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Essay example - Cost allocation
Finance & Accounting
Pages 3 (753 words)
Cost Allocation Name of Author Author’s Affiliation Author Note Author note with more information about affiliation, research grants, conflict of interest and how to contact Cost Allocation 1. What methods of cost allocation were used? Cost allocation is very important as is evident from the fact that various firms use several methods of cost allocation…
Extract of sample
It has to be determined in the beginning as to which divisions in the hospital can be differentiated as service centers or revenue centers and it should be decided how the service costs will be assigned in the hospital and the correct cost drivers should be chosen as well. The direct allocation of costs may not be a clear reflection of the revenue center’s actual use of service. While Western hospital is charging $555 from the patient, the Academic Hospital is charging from the former, $450 instead of $400, when $400 was the negotiated price. Moreover, Western Hospital has found that an independent laboratory agrees to do the work for $375 as compared to the $400 that the other hospital is charging. This implies that there is no rational cost allocation method that has been adopted by the Academic hospital in fixing its costs. Furthermore, the Academic Hospital was charging $90 for overhead costs, which is applicable in both the cases, whether the amniocentesis laboratory tests were done there or not. The hospital even demanded to charge $60 in case of incurring profit. This is not a correct cost allocation as it is not at all systematic. Since it is a merger, there should be profits for both the firms, then only they can continue the business in a harmonious way. ...
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