Community Recovery Clinic – Cost Allocation

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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.