Case 3 (Cost Allocation Concepts) El Paso Medical Center focuses not on the mechanics of cost
allocation, but rather on the key issue of what constitutes a good cost driver Managerial Accounting Case 3 (Cost Allocation Concepts) El Paso Medical Center focuses not on the mechanics of cost
allocation, but rather on the key issue of what constitutes a good cost driver. Primarily, students must
ponder the “fairness” of allocating a higher amount of facilities overhead to a department that is
being forced to move to a new facility. Along the way, the case raises several other issues regarding
cost drivers, fairness, and cost reduction effectiveness. The case requires only limited quantitative
analysis.
CASE 3 QUESTIONS
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 has aggregated all facilities costs, and then allocated the total amount on the basis of square footage. This methodology assigns 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 marginal facilities 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 facilities costs is implemented, what should be the facilities allocation to the Dialysis Center in 20 years, when the loan, and hence total cost of the move, has been paid off and there are no longer any actual facilities 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?
5. When all issues related to the decision are considered, what is your recommendation regarding the final allocation amounts | 