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14-16(15-20 min.)   Cost allocation in hospitals, alternative allocation


1.Direct costs=$2.40

Indirect costs=$11.52 – $2.40 = $9.12

Overhead rate==  380%

2.The answers here are less than clear-cut in some cases.

Overhead Cost Item

Allocation Criteria

Processing of paperwork for purchase

Supplies room management fee

Operating-room and patient-room handling costs

Administrative hospital costs

University teaching-related costs

Malpractice insurance costs

Cost of treating uninsured patients

Profit component

Cause and effect

Benefits received

Cause and effect

Benefits received

Ability to bear

Ability to bear or benefits received

Ability to bear

None.  This is not a cost.

3.Assuming that Meltzer's insurance company is responsible for paying the $4,800 bill, Meltzer probably can only express outrage at the amount of the bill.  The point of this question is to note that even if Meltzer objects strongly to one or more overhead items, it is his insurance company that likely has the greater incentive to challenge the bill.  Individual patients have very little power in the medical arena.  In contrast, insurance companies have considerable power and may decide that certain costs are not reimbursable––for example, the costs of treating uninsured patients.

14-17  (15 min.) Cost allocation and motivation.

Because corporate policy encourages line managers to seek legal counsel on pertinent issues from the Legal Department, any step in the direction of reducing costs of legal department services would be consistent with the corporate policy.

Currently a user department is charged a standard fee of $400 per hour based on actual usage. It is possible that some managers may not be motivated to seek the legal counsel they need due to the high-allocated cost of the service. It is also possible that those managers whose departments are currently experiencing budgetary cost overruns may be disinclined to make use of the service; it would save them from the Legal Department’s cost allocation. However, it could potentially result in much costlier penalties for Environ later if the corporation inadvertently engaged in some activities that violated one or more laws.

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