Chapter 14 Solutions

Chapter 14 Solutions - Selected Solutions for Chapter 14...

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Selected Solutions for Chapter 14 14-16 (15-20 min.) Cost allocation in hospitals, alternative allocation criteria. 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. 14-1
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14-18 (30 min.) Cost allocation to divisions. 1. Hotel Restaurant Casino Rembrandt Revenue $16,425,000 $5,256,000 $12,340,000 $34,021,000 Direct costs 9,819,260 3,749,172 4,248,768 17,817,200 Segment margin $ 6,605,740 $1,506,828 $ 8,091,232 16,203,800 Fixed overhead costs 14,550,000 Income before taxes $ 1,653,800 Segment margin % 40.22% 28.67% 65.57% 2. Hotel Restaurant Casino Rembrandt Direct costs $9 , 819 , 260 $3 , 749 , 172 $4 , 248 , 768 $17 , 817 , 200 Direct cost % 55.11% 21.04% 23.85% 100.00% Square footage 80,000 16,000 64,000 160,000 Square footage % 50.00% 10.00% 40.00% 100.00% Number of employees 200 50 250 500 Number of employees % 40.00% 10.00% 50.00% 100.00% A: Cost allocation based on direct costs: Hotel Restaurant Casino Rembrandt Revenue $16,425,000 $ 5,256,000 $12,340,000 $34,021,000 Direct costs 9,819,260 3,749,172 4,248,768 17,817,200 Segment margin 6,605,740 1,506,828 8,091,232 16,203,800 Allocated fixed overhead costs 8,018,505 3,061,320 3,470,175 14,550,000 Segment pre-tax income $ (1,412,765 ) $ (1,554,492 ) $ 4,621,057 $ 1,653,800 Segment pre-tax income % -8.60% -29.58% 37.45% B: Cost allocation based on floor space: Hotel Restaurant Casino Rembrandt Allocated fixed overhead costs $7,275,000 $1,455,000 $5,820,000 $14,550,000 Segment pre-tax income $ (669,260) $ 51,828 $2,271,232 $ 1,653,800 Segment pre-tax income % -4.07% 0.99% 18.41% C: Cost allocation based on number of employees Hotel Restaurant Casino Rembrandt Allocated fixed overhead costs $5,820,000 $1,455,000 $7,275,000 $14,550,000 Segment pre-tax income $ 785,740 $ 51,828 $ 816,232 $ 1,653,800 Segment pre-tax income % 4.78% 0.99% 6.61% 14-2
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3. Requirement 2 shows the dramatic effect of choice of cost allocation base on segment
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This note was uploaded on 07/08/2009 for the course ACCT 311 taught by Professor Staff during the Spring '09 term at George Mason.

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Chapter 14 Solutions - Selected Solutions for Chapter 14...

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