Cost Allocations

Topics: Costs, Economics, Cost Pages: 13 (2337 words) Published: August 8, 2013
Apple Valley Family Practice

July 2013
Cost Allocation Methodologies
Prepared for Group Executive Committee
Nadine
Presented by
Apple Valley Family Practice

July 2013
Cost Allocation Methodologies
Prepared for Group Executive Committee
Nadine
Presented by

Introduction
Apple Valley Family Practice is a medical practice with four locations in the Minneapolis/St. Paul area. The clinical staff consists of 20 physicians, all of whom practice in one or more areas of family medicine, and 46 physician extenders and nurses. The Group Organization

Three Support departments:
•Administration
•Facilities
•Finance

Three Support departments:
•Administration
•Facilities
•Finance

Three patient services departments:
•Adult Medicine
•Obstetrics
•Pediatrics

Three patient services departments:
•Adult Medicine
•Obstetrics
•Pediatrics

Purpose
The purpose of this executive summary is to choose the allocation method that will meet the Groups mission and budget goals. What is Cost Allocation?
Cost Allocation is a method to identify and distribute indirect costs. Direct costs are costs assignable to a specific cost objective, whereas indirect costs are costs incurred for multiple cost objectives or not assignable to a specific cost objective without effort disproportionate to the benefit received.

Key points to remember: distribute cost to ensure fairness amongst the departments as well as keep it simple and straight forward.

There were four methods that were considered: Direct, step-down, double apportionment, and reciprocal. Additionally, consideration was given with regards to the cost involved in implementing each allocation method.

Review (Revenue/Cost Projects and Allocation Percentages)

Departmental Revenue and Cost Projections CY-2014

Revenues:| |
Adult Medicine| $12,000,000. |
Obstetrics| 6,000,000.|
Pediatrics| 2,000,000.|
Total Revenues| $20,000,000.|
| |
Direct Costs:| |
Patient Services Departments | |
Adult Medicine| $ 6,000,000.|
Obstetrics| 3,600,000.|
Pediatrics| 1,200,000.|
Subtotal| $10,800,000.|
Support Departments| |
Administration| $ 1,000,000.|
Facilities| 4,400,000.|
Finance| 1,800,000.|
Subtotal| $ 7,200,000.|
Total Expenses| $18,000,000.| | |
Pre-tax profit| $ 2,000,000.|

Allocation Percentages
| Percentage of Services Provided by|
Services Provided to| Administration| Facilities| Finance| Administration| | 5%| 5%|
Facilities| 10%| | 5|
Finance| 10| 10| |
| | | |
Adult Medicine| 35| 55| 50|
Obstetrics| 20| 10| 25|
Pediatrics| 25| 20| 15|
| | | |
Total| 100%| 100%| 100%|

 | Adult Medicine| Obstetrics| Pediatrics| PS Total|
Administration allocation | $ 437,500| $ 250,000| $ 312,500| $ 1,000,000| Facilities allocation| 2,847,059| 517,647| 1,035,294| 4,400,000| Finance allocation| 1,000,000| 500,000| 300,000| 1,8000,000| Total| $ 4,284,559| $ 1,267,647| $ 1,647,794| $ 7,200,000|

 | Adult Medicine| Obstetrics| Pediatrics| PS Total|
Administration allocation | $ 437,500| $ 250,000| $ 312,500| $ 1,000,000| Facilities allocation| 2,847,059| 517,647| 1,035,294| 4,400,000| Finance allocation| 1,000,000| 500,000| 300,000| 1,8000,000| Total| $ 4,284,559| $ 1,267,647| $ 1,647,794| $ 7,200,000|

Allocation Method: Direct Method

•Strengths: easy to calculate and implement.
•Weaknesses: misstates Opportunity Costs and does not charge service departments for the use of other service department. •Direct method is the least...
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