House Keeping Department of Ruger Clinic

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 $5 million 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 the cost pool? A cost pool consists of all the direct costs of one support department. In this case, the House keeping department of Ruger Clinic had $100,000 as total budgeted costs for the year 2007.
Hence cost pool = $100,000.
2 a What is the allocation rate if patient services revenue is used as the cost driver?
Cost drivers are to possess two important characteristics, fairness and cost control. To identify the allocation rate, first the cost pool must be established and then the best cost driver must be identified. In this case, cost pool is the total costs of the house keeping department which is $100,000. The patient services revenue was given to be $5,000,000.
Hence, Allocation rate = cost pool/ patient services revenue = 100,000/ 5,000,000 = 0.02 for each dollar of patient services revenue.
2 b What is the allocation rate if hours of housekeeping services department is used as the cost driver?
Allocation rate = cost pool/ hours of housekeeping department = 100,000/ 5000 = $20 per hour of services provided.
3 What is a cost-volume-profit (CVP) analysis and why is it useful to health services managers?
Profit analysis is an analytical technique used to analyze the effects of volume changes on costs, and hence this analysis is often called cost-volume-profit or (CVP)