Question

Allocate the cost of service centers to operating departments step method:

Jenkins Health Care Center has three clinics servicing the Seattle metropolitan area. The company's legal services department supports the clinics. Moreover, its computer services department supports all of the clinics and the legal services department. The annual cost of operating the legal services department is $256,000. The annual cost of operating the computer services department is $480,000. The company uses the number of patients served as the cost driver for allocating the cost of legal services and the number of computer workstations as the cost driver for allocating the cost of computer services.

Other relevant information follows:

number of patient(NP)

number of workstation(NW)

cobb clinic 6,000(NP) 18(NW)

victoria clinic 4,200(NP) 16(NW)

pied clinic 5,800(NP) 18(NW)

legal service 8(NW)

computer serv 10(NW)

Required:

a) Allocate the cost of computer services to all of the clinics and the legal services department.

b) after allocating the cost of computer services, allocate the cost of legal services to the three clinics.

c) Compute the total allocated cost of the service centers for each clinic.

Answer 1

To allocate service center costs, first allocate the computer services cost based on workstations, then allocate legal services cost based on the number of patients, and finally sum the allocated costs for each clinic to determine total allocated costs.

Step-by-step explanation:

To allocate the cost of service centers to operating departments using the step method, we first need to allocate the cost of computer services, then allocate the cost of legal services.

Step 1: Allocating the Cost of Computer Services

The total number of workstations is 18 (Cobb Clinic) + 16 (Victoria Clinic) + 18 (Pied Clinic) + 8 (Legal Services) = 60 workstations. The cost per workstation is $480,000 / 60 = $8,000. Here's how the cost allocation for computer services would look:

• Cobb Clinic: 18 workstations * $8,000 = $144,000
• Victoria Clinic: 16 workstations * $8,000 = $128,000
• Pied Clinic: 18 workstations * $8,000 = $144,000
• Legal Services: 8 workstations * $8,000 = $64,000

Step 2: Allocating the Cost of Legal Services

After the allocation of computer services, we allocate the legal services cost using the number of patients as the cost driver. First, we sum the total number of patients: 6,000 (Cobb) + 4,200 (Victoria) + 5,800 (Pied) = 16,000 patients. The cost per patient is $256,000 / 16,000 = $16 per patient. The allocation for legal services is as follows:

• Cobb Clinic: 6,000 patients * $16 = $96,000
• Victoria Clinic: 4,200 patients * $16 = $67,200
• Pied Clinic: 5,800 patients * $16 = $92,800

Step 3: Computing Total Allocated Costs

Finally, we add up the allocated costs of computer and legal services for each clinic:

• Cobb Clinic: $144,000 + $96,000 = $240,000
• Victoria Clinic: $128,000 + $67,200 = $195,200
• Pied Clinic: $144,000 + $92,800 = $236,800

Answer 2

To allocate service department costs to operating departments, calculate the respective cost driver units, distribute computer services costs based on the number of workstations, then allocate legal services costs based on the number of patients served. Finally, sum the allocated costs to find the total cost allocation for each clinic.

Step-by-step explanation:

Allocate Costs of Service Centers to Operating Departments Using Step Method

To allocate the costs of computer services and legal services to the operating departments (clinics), we follow a step method:

1. Compute the Total Number of Units for the cost driver for computer services (number of workstations):
   Cobb Clinic: 18
   Victoria Clinic: 16
   Piedmont Clinic: 18
   Legal Services: 8
   Computer Services: 10
   Total: 70 workstations.
2. Allocate Computer Services Costs: We distribute the annual cost of the computer services ($480,000) based on the ratio of each department's workstations to the total number of workstations:
   Cobb Clinic: ($480,000 x 18/70)
   Victoria Clinic: ($480,000 x 16/70)
   Pied Clinic: ($480,000 x 18/70)
   Legal Services: ($480,000 x 8/70).
3. Allocate Legal Services Costs: After the computer services costs are allocated, the cost of legal services ($256,000) is allocated to the clinics based on the number of patients served as the cost driver.
4. Compute Total Allocated Cost: For each clinic, add the allocated cost of computer services to the allocated cost of legal services to determine the total cost allocation for the service centers.

By following these steps, we can accurately distribute the service department costs to the clinics and the legal services department, which further aids in determining the efficiency and profitability of each department.