I.

MULTIPLE CHOICE:

1. Which of the following statements about cost allocation is(are) most correct?

a. The direct method is conceptually best and least expensive to implement.

b. The step-down method recognizes all intra-support department costs.

c. The reciprocal method is conceptually best but typically the most expensive to

implement.

d. Both (a) and (b) are correct.

e. Both (b) and (c) are correct.

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2. Which of the following statements about cost allocation is most correct?

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a. The direct method of allocation recognizes services provided by support departments to

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one another.
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b. A cost driver is any grouping of overhead costs that must be allocated.

c. The reciprocal method of allocation is a compromise between the direct method and
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step-down method.

d. A cost pool is the total amount of direct costs incurred by one of the patient service
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departments.

e. None of the above statements is correct.

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3. Which of the following statements about the step-down method of cost allocation is(are) most
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correct?

a. The step-down method requires that overhead departments be ranked by the amount of ser-
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vices they provide to one another.

b. The step-down method does not allocate costs from each overhead department to every
other overhead department.

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 c. The step-down method is less complex than the reciprocal method.

d. The step-down method is more complex than the direct method.

e. All of the above answers are correct.

4. Which of the following pricing strategies is most likely to lead to long-term financial sustain-
ability?

a. Full cost

b. Marginal cost

c. Direct cost

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d. Indirect cost

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e. Variable cost

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5. Which of the following strategies is most likely to ensure profitability on a contract under-
taken by a price-taker provider?
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a. Full cost pricing

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b. Marginal cost pricing

c. Target costing
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d. Zero cost pricing

e. Direct cost pricing

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 The Housekeeping Department of Ruger Clinic had $300,000 in direct costs during 2011 that
must be allocated to Ruger’s three revenue–producing patient service departments using the di-
rect method. Hours of housekeeping services will be used as a cost driver for allocation. Three
patient service departments are adult services, pediatric services and other services. These three
departments used a total of 6,000 hours of housekeeping. The distribution of 6,000 housekeeping
hours by services departments is as follows

Departments House keeping hours

Adult Services 1,000

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Pediatric Services 3,000

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Other Services 2,000

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Total 6,000
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a. what is the allocation rate?
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300,000/6,000 = 50
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b. what is the dollar allocation to each patient service department?

adult services: 50*1000 = $50,000

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pediatric services: 50*3000 = $150,000

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other services: 50*2000 = $100,000

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Assume that managers of QVC Hospital are setting the price on a new outpatient service. Here
are relevant data estimate:

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 Variable cost per visit: $25.00
Annual direct fixed costs: $750,000
Annual overhead allocation: $275,000
Expected annual utilization: $20,000 visits

a. What per visit price must be set for the service to accounting breakeven to earn annual
profit of $100,000?
750,000+275,000 = 1,025,000
(1,025,000+100,000)/20,000+25
$81.25

b. Repeat part a, but assume the variable cost per visit is $27
(1025000+100,000)/20,000+27
$83.25

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c. Return on the original data given in the problem. Again repeat part a, but assume that di-

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rect fixed costs are $800,000.
800,000+275,000 = 1075000

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(1075000+100,000)/20,000+25
$83.75 rs e
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d. Repeat part a assuming both $27 variable cost and $800,000 in direct fixed costs.
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800,000+275,000 = 1075000
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(1075000+100,000)/20000+27
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$85.75
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