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QUESTION

# I think that in the direct method the allocation rate would be:

I really need help with cost allocation in my finance course. I think that in the direct method the allocation rate would be: \$5,000,000/600,000 square feet for the allocation rate * each patient services square footage for the allocation. I would really really appreciate help and clarification with this.

St. Benedict's Hospital has three support departments and four patient services departments. The direct costs to each support department are

Facilities: \$5,000,000

Financial services: \$3,000,000

Department

Support:

General Administration - 10,000 square feet

Facilities: 20,000 square feet

Financial services: 15,000 square feet

Total: 45,000 square feet

Patient services:

Routine care - 400,000 square feet

Intensive care - 40,000 square feet

Diagnostic services - 60,000 square feet

Other services - 100,000 square feet

Total: 600,000 square feet

Grand total: 645,000 square feet

Patient Services:

Assume that the hospital uses the direct method or cost allocation. If the cost driver for facilities is space utilization, what is the appropriate allocation rate? Allocate the hospital's facility overhead cost to the patient services department.