Response to the following problem:
A small hospital with two service departments and three revenue areas: The hospital wants to allocate the service department costs to the revenue areas. Housekeeping is allocated based on square footage; Laundry is allocated based on pounds of laundry. The normal capacity for Surgery is 200 hours per month; normal capacity for semiprivate rooms is 600 patient days; and normal capacity for maternity is 200 patient days.
Service Dept. Direct Costs Sq Ft Laundry Pounds
Housekeeping $80,000 - 16,000
Laundry $132,000 500
Revenue Areas
Surgery $400,000 1,500 48,000
Semiprivate Rooms $200,000 2,000 24,000
Maternity $150,000 1,000 12,000
Required:
Determine the overhead rate for the three revenue areas. Allocate the service department costs to the revenue areas using the step method. Allocate the service department with the largest dollar value first.