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    Cost Allocation in Hospitals

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    Elliot Richard
    The document discusses a $11.52 charge for a cotton roll that a patient received during a two-day hospital stay. It provides the breakdown of costs for the cotton roll, which included $2.40 in direct costs and $9.12 in indirect costs, resulting in an overhead rate of 380%. It then asks what criteria the hospital may use to justify various overhead items and what the patient should do about the cotton roll charge.

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    Cost Allocation in Hospitals

    Uploaded by

    Elliot Richard
    317 views2 pages
    The document discusses a $11.52 charge for a cotton roll that a patient received during a two-day hospital stay. It provides the breakdown of costs for the cotton roll, which included $2.40 in direct costs and $9.12 in indirect costs, resulting in an overhead rate of 380%. It then asks what criteria the hospital may use to justify various overhead items and what the patient should do about the cotton roll charge.

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    The document discusses a $11.52 charge for a cotton roll that a patient received during a two-day hospital stay. It provides the breakdown of costs for the cotton roll, which included $2.40 in direct costs and $9.12 in indirect costs, resulting in an overhead rate of 380%. It then asks what criteria the hospital may use to justify various overhead items and what the patient should do about the cotton roll charge.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    317 views2 pages

    Cost Allocation in Hospitals

    Uploaded by

    Elliot Richard
    The document discusses a $11.52 charge for a cotton roll that a patient received during a two-day hospital stay. It provides the breakdown of costs for the cotton roll, which included $2.40 in direct costs and $9.12 in indirect costs, resulting in an overhead rate of 380%. It then asks what criteria the hospital may use to justify various overhead items and what the patient should do about the cotton roll charge.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 2

    Cost allocation in hospitals, alternative allocation criteria.

    Dave Meltzer vacationed at


    Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the
    Sierra University Hospital. Meltzer’s insurance company received a $4,800 bill for his two-day
    stay. One item that caught Meltzer’s attention was an $11.52 charge for a roll of cotton. Meltzer
    is a salesman for Johnson & Johnson and knows that the cost to the hospital of the roll of cotton
    is between $2.20 and $3.00. He asked for a breakdown of the $11.52 charge. The accounting
    office of the hospital sent him the following information:

    Meltzer believes the overhead charge is outrageous. He comments, “There was nothing I could
    do about it. When they come in and dab your stitches, it’s not as if you can say, ‘Keep your
    cotton roll. I brought my own.’”
    1. Compute the overhead rate Sierra University Hospital charged on the cotton roll.
    2. What criteria might Sierra use to justify allocation of the overhead items b–i in the preceding
    list?
    Examine each item separately and use the allocation criteria listed in Exhibit 14-8 (page 592) in
    your answer.
    3. What should Meltzer do about the $11.52 charge for the cotton roll?

    (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 Cause and effect
    Supply-room management fee Benefits received
    Operating-room and patient-room handling costs Cause and effect
    Administrative hospital costs Benefits received
    University teaching-related costs Ability to bear
    Malpractice insurance costs Ability to bear or benefits received
    Cost of treating uninsured patients Ability to bear
    Profit component 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.

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