Cost Allocation Concepts
1. Is it "fair" for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space?
2. In the past, the medical center aggregated all facility costs and then allocated the total amount
on the basis of square footage. This methodology assigned an average cost rate to each patient service department, regardless of whether its space is new or old, or prime or poor. The proposed allocation for the Dialysis Center, on the other hand, requires it to bear the true facility costs of its new space. What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme?
3. If the new allocation method for facility costs is implemented, what should be the facility allocation to the Dialysis Center in 20 years, when the loan (which is the basis for the higher cost allocation) has been paid off and there are no longer any actual facility costs?
4. Explain how the revenue from medical (pharmacy) supplies is currently handled for profit and loss reporting purposes. Is there a problem with the current system? Is there a better way of reporting this revenue? If so, what is it?
5. When all issues related to the decision are considered, what is your recommendation regarding the final allocation amounts?