HEALTH FINANCIAL MANAGEMENT

The Housekeeping Service department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 in direct costs in 2007. These costs must be allocated to Ruger’s three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5million in total revenues in 2007, and to support these clinical activities, they used 5,000 hours of housekeeping services.

1) What is the value of cost pool?
Sol)A critical part of cost measurement at the subunit level is the assignment or allocation, of indirect costs. Cost allocation is essentially a pricing process within the organization whereby managers allocate the costs of one department to other departments. To assign costs, two important elements must be identified: a cost pool and a cost driver. A cost pool is a grouping of costs that must be allocated. Hence the value of Cost pool for the above question is $100,000.

2) What is the allocation rate if: a. Patient services revenue is used as the cost driver?
Sol) Allocation rate = Cost pool/patient services revenue = $ 100,000/$5,000,000 = $0.02 per dollar of patient services revenue.

b. Hours of housekeeping services is used as the cost driver?
Sol) Allocation rate = Cost pool/hours of housekeeping services = $100,000/5000 = $20 per hour consumed for housekeeping services.

3) What is a cost-volume-profit (CVP) analysis and why is it useful to health services managers?
Sol) Profit analysis is an analytical technique typically used to analyze the effects of volume changes on profit. The same procedures can be used to assess the effects of volume changes on costs, so this type