Allocation Costs

Cost Allocation

Misty Pitts

ACC/HC 561

August 19, 2013

David Mobile

Cost Allocation

A year ago Academic Hospital and Western Hospital merged and eliminated services. Academic Hospital eliminated their maternity services and Western Hospital eliminated a portion of their internal laboratory. A problem arose when Western Hospital demanded a price reduction for the laboratory work associated with amniocentesis. As each organization still maintains its own profit centers and owned by one parent organization prices were looked at. An oversight meeting was conducted to validate transfer prices under the following; full charges, variable costs, market price and negotiated price. First looked at was transfer price, profit under the alternatives, combined hospitals under alternatives and if an outside laboratory usage.

Method of Allocation

The organization used transfer pricing for the method of profit allocation. Transfer pricing is used in industries to transfer goods or services from one responsibility center to another responsibility center as these hospitals did for laboratory services (Finkler, para. Transfer Pricing,  2007). Market prices are used in order to make this principle fair. If this in not available then than annual share of the fixed costs of the service department plus the variable costs for services be used. Academic Hospital and Western hospital used both in the cost allocations.

Transfer Price

Western utilization of 300 amniocenteses per year found an independent laboratory will do the work for $375 compared to the $400 price of Academic Hospital. The two hospitals found that the direct costs were $300 in labor and supplies. Academic was charging $90 for overhead with a $60 profit. Western is making $105 profit but could raise the profit by $75 if the laboratory work reduced by $75.

Profit under Alternatives

The following calculation indicates how much profit each hospital would make under each alternative.

Full Charges |

Labor...