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Cost allocation - Essay Example

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Author : jgottlieb
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This research aims to evaluate and present cost allocation and cost centres. A cost centre is part of an organization that does not produce direct profit and adds to the cost of running a company. Its examples include research and development departments, marketing departments, help desks and customer service…

Extract of sample
Cost allocation

The intention of this study is cost allocation as is evident from the fact that various firms use several methods of cost allocation. A cost allocation method should meet the specific criteria of the organization so that the ineligible items needed in cost appropriation can be removed and more appropriate items can be included. A systematic and rational cost allocation method should be adopted in the organization. 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. ...
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