Allocation of Costs analysis for Jump Hospital
PUBLIC ADMINISTRATION PAPER
According to Isai, V. et al. (2014), cost allocation refers to the assignment of a shared cost to numerous cost objects. The cost allocation or spreading the cost can range from departmental rates to plant-wide rates, from machine hours to direct labor hours. Lastly, the allocation of costs can use activity based costing as a method of spreading the costs. According to Finkler, S. A. et al. (2013), The Activity Based Approach (ABC) allocates manufacturing overheads in a more logical manner compared to the traditional approach. The main objective of the cost allocation is to assign the costs based on the root causes of the mutual costs instead of simply disseminating the costs.
Jump Hospital presently apportions all maintenance department costs on the basis of departmental square feet. However, there is a suggestion by the manager of the pharmacy department to use the ABC approach for the apportionment of the maintenance department costs relating to the repairing of the equipment (Hughes, M. 2016). Her argument is that the pharmacy has comparatively diminutive paraphernalia that breaks. Nevertheless, it must endow many advanced departments that necessitate exclusive equipment repairs. This paper calculates the maintenance cost allocated to the pharmacy using the existing or traditional method and using an ABC approach.
In the traditional approach, Jump Hospital allocates costs on departmental square feet. The total overheads amounts to $ 115, 000 and its total allocation to the pharmacy department is $2,300. However, the proposal to change to an ABC approach that allocates costs on repairing of equipment will raise the allocation to $ 2,875. The excel sheet shows the calculations using both the methods.
Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L. (2013) Financial management for public, health, and not-for-profit organizations (4th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Hughes, M. (2016). The Simple Analytics of Matrix Accounting, Activity‐Based Costing, and Linear Programming. Journal of Corporate Accounting & Finance, 27(3), 31-37.
Isai, V., Radu, R. I., & Ionescu, C. (2014). A Study on the ABC Approach in Cost Management Practice. Risk in Contemporary Economy, 346-351.
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