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Allocation of Costs

Allocation of Costs

Analyze the following scenario: Jump Hospital currently allocates all maintenance department costs based on departmental square feet.  However, the manager of the pharmacy department has suggested that an ABC approach be used for the portion of the maintenance department costs that relate to repairing equipment.  Her contention is that the pharmacy has relatively little equipment that breaks.  However, it must subsidize many high-tech departments that require expensive equipment repairs.  Using the tables below, calculate the maintenance cost assigned to the pharmacy using the existing method and using an ABC approach.  Clearly label your calculations in your analysis.

Maintenance Costs
Routine Maintenance Repairs Total
Volume (Square Feet) 100,000 800
Labor Hours 10,000 4000 14,000
Labor Cost/Hour $12.00 $18.00 $13.71
Supplies $20,000 $80,000 $100,000
Administration $15,000


Department Information
Pharmacy All Other Departments Total
Square Feet 2,000 98,000 100,000
Volume of Repairs 3 797 800
Hours of Repairs 6 3,994 4,000
Supplies Used for Repairs $200 $79,800 $80,000

use reference below


Finkler, S. A., Purtell, R.M., Calabrese, T.D., & Smith, D.L. (2013). Financial management for public, health, and not-for-profit organizations (4th ed.).  Upper Saddle River, NJ: Pearson Prentice Hall.



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