The hospital is a crucial and complex organ that performs a very important task, which is, ensuring every person can obtain healthcare. This complex organ is made up of numerous structures that work together to perform this main task. One of these structures are health service centers. These are units that offer extra-healthcare services or products to people in a hospital, for example, a hospital cafeteria. Service centers do not bring in income themselves, but they aid the other departments and hence their functioning is vital. For them to continue functioning the hospital allocates the service centers costs to other departments. This paper discusses the method used when allocating costs.
According to Metzger (1992) service center cost allocation has been practiced for a long while in hospitals for the purpose of good financial reporting. Metzger clearly states that the reciprocal method of allocation is the best and most accurate method to be used in hospitals. It is relied upon when it comes to decision making instances. In the reciprocal method of cost allocation, the costs of service centers are allocated simultaneously. Here, simultaneous equations are obtained and solved to get the balances of the other hospital departments, after which the costs for the service centers are allocated. This method deals mostly with percentages.
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Example:
This example will involve three production sections (A, B, C) in a certain hospital and two service centers (L, M). The operating costs for each are given below;
Sections Operating costs
A $3500
B $6400
C $1900
L $2200
M $3800
The allocation percentages are;
Section A B C L M
L 20% 25% 25% - 10%
M 25% 30% 30% 15% -
Now the simultaneous equation is applied
Solution
L = operating costs of center L after allocation
M= operating costs of center M after allocation
Now the operating costs of center L is $2200 added to 15% of center M operating costs
And the operating costs of center M is $ 3800 added to 10% of center L operating costs. Which is now;
L= 2200 + 0.15M
M= 3800 + 0.10L
The operating costs of the two service centers will be obtained and then allocated to the other production sections using the percentages shown.
L= 2,812.2
M= 4,081.2.
In conclusion, cost allocation in hospitals has become easier since the emergence of the reciprocal method of allocation if hospitals want to function effectively despite having service centers in their midst they should apply this method of cost allocation.
References
Metzeger, M. L. (1992). Using Reciprocal Allocation of Service Department Costs for Decision Making, Hospital Cost Management and Accounting 4(9), 1-6.
