Rio Grande Medical Center Cost Allocation Concepts

HCM 681
Introduction to the Financial Management of Healthcare Organizations

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?
The building of the new facility is not expected to affect revenue, direct cost and patient volume. The Dialysis Center will provide the same services for its patients, but with different location of the facility. There is no reason for the personnel of the facility to be penalized financially, since the decision for the relocation of the building was taken due to recent growth in volume of the Outpatient Clinic. …show more content…
The remaining profit would accrue to the Pharmacy Department since their cost of the pharmacy supplies would be less than the revenue booked on the supplies. This would provide justification for the allocation of the overhead costs on pharmacy supplies revenue.

5. When all issues related to the decision are considered, what is your recommendation regarding the final allocation amounts?
As Alternative allocation scheme the following information can be taken from the case.
The Dialysis Center revenue would fall to $1,900,000 when the pharmacy charge is taken out.
$2,700,000-$800,000=$1,900,000
If there is no change of the allocation rate as 10% revenue, the new general overhead allocation would be:
0.10 X $1,900,000=$190,000
The reduction in general overhead allocation to the Dialysis Center of:
$270,000 - $190,000 =$80,000

Must be offset by increase of general allocation to the Outpatient Clinic:
$2,000,000 + $80,000= $2,080,000 The facility costs within the outpatient clinic would be:
$400,000 + $1,500,000= $1,900,000 The total square footage for all departments is 120,000 and the new allocation rate is:
$1,900,000/ 120,000= $15.8333 per square foot Allocation for the Outpatient clinic: $15.8333X 100,000sq.ft. = $1,583,333
Allocation for the Dialysis Center: