Community Recovery Clinic – Cost Allocation

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. 

  Number of  Square

  Departments  Employees  Footage

  Inpatient  40  20.000

  Outpatient  20  10,000

  Administration  10  5,000 

  Housekeeping  5  5,000

Overhead costs for each department are as follows:

  Administration  $500,000

  Housekeeping  $200,000

Administration is allocated based on number of employees and housekeeping is based on square footage. Carry out calculations to four decimal places.

Required:

1. Allocate service department costs using the direct method.
2. Allocate service department costs using the reciprocal method.
3. What is the other method of allocation?
4. Briefly discuss the pros and cons of each method and select the best one.

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