Community Recovery Clinic offers two types of services inpat

Community Recovery Clinic offers two types of services: inpatient and outpatient. They have two types of service departments: administration and housekeeping. Direct costs of nursing care and supplies can be traced directly to the patient. Overhead costs for each department are as follows: Administration is allocated based on number of employees and housekeeping is based on square footage. Carry out calculations to four decimal places. Allocate service department costs using the direct method. Allocate service department costs using the reciprocal method. What is the other method of allocation? Briefly discuss the pros and cons of each method and select the best one.

Solution

3 Other Method of allocation is Step down method

4 Direct Cost allocation Method is the traditional and Most Simple method to allocate the cost. It allocates service department cost directly between the production department.It is simple and easy to understand and calculate. It is based on the assumption that the Service department does not provide service inter departmentally. However it is not correct in the practice so it is not full proof.

Reciprocal Method of Allocation is the allocation of Service department cost on the assumption that service department interdepartmentally provides the services so it is more efificient allocation of cost however it is very complex in calculation.

Community Recovery Clinic
Allcation of Service Department Cost
Direct Method
		Department
Particulars	Ratio	Inpatient	Outpatient
Administration	2:01	333333.3333	166667.6666
Housekeeeping	2:01	133333.3333	66666.6666
Total Allocated Cost		466666.6666	233334.3332
Community Recovery Clinic
Allcation of Service Department Cost
Reciprocal Method
		Impatient	Outpatient	Administration	Housekeeping
Overhead Cost before allocation		0	0	500000	200000
Allocation of Housekeeping	4:02:01	114285.7143	57142.8571	28571.43	-200000
Cost After allocation of Housekeeping		114285.7143	57142.8571	528571.4	0
Allocation of Administration	2:01	352380.9524	176190.4762	-528571	0
Cost after allocation of Administration		466666.6667	233333.3333	0	0