determine the allocation rates for each activity center cost pool 641320

(Cost drivers; ABC; analysis) Shirtz Community Hospital has been under increasing pressure to be accountable for its patient charges. The hospital’s cur rent pricing system is ad hoc, based on pricing norms for the geographical area; only direct costs for surgery, medication, and other treatments are explicitly considered. The hospital’s controller has suggested that the hospital improve pricing policies by seeking a tighter relationship between costs and pricing. This approach would make prices for services less arbitrary. As a first step, the controller has determined that most costs can be assigned to one of three cost pools. The three cost pools follow along with the estimated amounts and activity drivers.

Activity Center	Amount	Activity Driver	Quantity
Professional salaries	$13,125,000	Professional hours	75,000 hours
Building costs	6,187,500	Square feet used	56,250 sq. ft.
Risk management	850,000	Patients served	2,500 patients

The hospital provides service in three broad categories. The services follow with their volume measures for the activity centers.

	Professional	Square	Number of
Service	Hours	Feet	Patients
Surgery	3,750	12,500	500
Housing patients	70,000	27,500	1,250
Outpatient care	1,250	16,250	750

a. What bases might be used as cost drivers to allocate the service center costs among the patients served by the hospital l? Defend your selections.

b. The hospital currently charges an “add on” rate calculated using professional hours to patients’ direct charges. What rate is Shirtz Community Hospital charging per hour? (Round to the nearest dollar.)

c. Determine the allocation rates for each activity center cost pool.

d. Allocate the activity center costs to the three services provided by the hospital.

e. Shirtz Community Hospital has decided to estimate costs by activity center using professional hours. What is the cost per professional hour of each activity center? What would cause the cost per hour difference for the three services? (Round to the nearest dollar.)