Direct Method Illustration (5)
Posted on September 6, 2009 - Filed Under Finance
As previously mentioned, the allocation of indirect costs can be viewedas an internal pricing mechanism. Thus, the revenue producing departmentheads can look at Table 6.5 and see the rate that they are being charged forsupport services, which amounts to;
• $0.05556 for each dollar of patient services revenue generated for Financial Services support.
• $12.64 per square foot of space utilized for Facilities support.
• $17.58 per labor hour consumed for Housekeeping support.
• $0.432 per salary dollar paid to department employees for Administrative overhead.
• $0.250 per salary dollar for Personnel support.
If Radiology pays a technician $10 an hour in direct labor costs for each hour the technician works, the department will also be charged 0.432 × $10.00 =
$4.32 for Administrative overhead, and 0.250 × $10.00 = $2.50 for Personnel overhead, plus additional allocations for Financial Services, Facilities, and Housekeeping support.
Having two support services, in this case Administration and Personnel, that utilize the same cost driver, salary dollars, is not unusual. However, the allocation rate is different for the two support departments because they have different cost pools (total costs).
The final step in the allocation process is to calculate the actual dollar allocation to each of the patient services departments, which is shown in Table 6.6. The support departments are listed in the first column, along with the applicable allocation rate, while the patient services departments are listed across the top. To illustrate the calculations, consider Routine Care. It produces $16,000,000 in patient services revenue, and the overhead allocation rate for Financial Services is $0.05556 per dollar of patient services revenue,
so the allocation for such support is 0.05556 × $16,000,000 = $888,960. Furthermore, Routine Care has 199,800 square feet of space; with a Facilities rate of $12.64 per square foot, its allocation for Facilities support is $12.64 × 199,800 = $2,525,472.
Taken From : HEALTHCARE FINANCE
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[…] The end result is that $8,644,050 out of a total of $13,850,000 of the indirect (overhead) costs of Kensington Hospital are allocated to Routine Care. Routine Care also has direct costs of $5,500,000, so the total costs […]