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Rio Grande Medical Center Cost Allocation

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Christopher Sandoval

on 14 December 2013

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Transcript of Rio Grande Medical Center Cost Allocation

Rio Grande Medical Center Cost Allocation
HCA 341

Even if the true cost concept were applied to the Dialysis Center, is the $400,000 annual allocation amount correct? After all, the building has a useful life that is probably significantly longer than 20 years the life of the loan used to determine the allocation amount. If the true cost concept is applied, what would be the allocation in the 21st year, after the mortagage had been paid off?
The revenue that the Dialysis Center "receives" from patient use of the pharmacy appears to be passed on directly to the pharmacy. That is, the Dialysis Center books $800,000 in annual revenue but then is charged $800,000 for the drugs used. Should this "revenue" be counted when general overhead allocations are made? To make this point, John discovered that the pharmacy supplies used for dialysis actually cost the pharmacy $400,000, so the pharmacy makes a profit of $400,000 on drugs that are actually "sold" by the Dialysis Center.
We believe that if the pharmacy supplies would be removed from the Dialysis center's P&L statement and instead added to the pharmacy departments P&L statement that it would reduce the Dialysis center's total revenue from $2.7 million to $1.9 million, their direct expenses from $2.1 million to $1.3 million as well as reducing general overhead cost by $800,000.
This adjustment will reduce overall cost and produce a fair indirect cost allocation scheme.

Is it fair for Dialysis Center to suffer (in profitability) from the move even though it had nothing to do with it?

We do not think that the Dialysis Center suffering in profitability from the move is fair. Being that the Dialysis Center was moved as a result of the Outpatient Clinics need for extra space, I do think that some of the costs of the new building and the relocation of the Dialysis Center should be paid through the Outpatient Center (a “buy out”). The fact that the indirect costs of the Dialysis Center are going up solely because of the fact that they were forced out to accommodate the Outpatient Center, forcing them into the red, is simply unfair and bad practice.

Should the Dialysis Center be charged actual facilities at the lower average allocation rate. Under the concept of charging for actual facilities costs, department heads might be better off resisting proposed moves to new (an potentially more efficient facilities because such moves would result in increased facilities allocations.)
Without the expansion, the Dialysis Center was paying $300,000 in facilities costs ($15 per square foot x 20,000 square feet). With the expansion, the Dialysis Center is paying $400,000 in facilities costs, $100,000 more solely because of the move forced upon them due to the Outpatient Centers need for more space.
Case Overview
Rio Grande Medical Center is a full-service not-for-profit acute care hospital.
A 100,000 square foot section of the hospital is devoted to outpatient services.
About 80% of the space is used by the outpatient clinic while the remaining 20 percent is used by the dialysis center.
Based on the recent growth in volume for the outpatient clinic there was a need for 25% more space than is currently assigned. Thus the decision was made for the dialysis center to be relocated to provide more space for the outpatient clinic.
It is forecasted that any indirect cost allocation affecting the dialysis center will likely bankrupt the department.
Given the current situation Rio Grande hospital must find a way to create a "Alternative Allocation" to please both the outpatient center as well as the dialysis center while at the same time keeping costs to a minimum and promoting cost savings for both departments.
New Indirect Allocation Scheme for Outpatient Services
Facility cost does not change, Since the costs for the new DC are directly quantifiable, it would cause unjust confusion to the structure already in place and the OC costs are based on the hospital standard rate, it would be too confusing to change allocated costs basted on $/SqFt. This is best left alone.

Because the facility cost of DC increases by 100k as per the direct cost of the new structure, they incure a (70,000) loss now. Since they are forced to move, it would be fair to take the difference in FC away from general overhead and add it to the general overhead of the OC dept.

By doing this, it allows DC to continue its normal 1.1% of sales net profit, instead of incurring a 2.6% loss. This would be a 3.7% swing, where as in this method, OC only has a 0.5% decrease in NI. This is the most fair approach
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