MHA 706 FINAL-LORD.Final Test 2026\2027.
Direct Costs
Costs unique and exclusive to a department. GENERATE REVENUE
Ex- costs associated with providing the clinical testing such as
staff and supplies.
Indirect costs (overheads)
Costs associated with shared resources used by the entire
organization
Ex-costs associated with central services such as human resources
and finance
Cost Allocation
Assign all overhead costs to the departments that create the need
for such costs, typically the patient services departments.
Cost Pool
Overhead amount to be allocated.
Consists of the direct costs of one overhead department.
Ex- HR Cost.
cost driver
Basis on which the cost pool will be allocated.
Ex- the cost driver for facilities overhead (building space
depreciation, maintenance, utilities, and so on) might be the
, MHA 706 FINAL-LORD.Final Test 2026\2027.
amount of space used by each department that uses the
organization's facilities.
Cost Allocation Rate
dividing # of dollars in cash pool/total volume of cost driver
What makes a good cost driver?
Perceived as being fair and promote organizational cost
reduction.
Assume that the cost driver for Housekeeping Services is the
amount of space occupied. User departments in total occupy
200,000 square feet of space.
Direct cost allocation method
the costs of each support department are allocated directly to,
and only to, the patient services departments.
Step-down allocation method
allocates support-department costs to other support departments
and to operating departments in a sequential manner that
partially recognizes the mutual services provided among all
support departments
What is the most used Cost Allocation Method?
Step-down method is used more because it recognizes at least
some of those interest support department relationships. So, it's a
fairer in efficient way of doing the allocation.
Reciprocal allocation method
allocates support-department costs to operating departments by
fully recognizing the mutual services provided among all support
departments
Direct Costs
Costs unique and exclusive to a department. GENERATE REVENUE
Ex- costs associated with providing the clinical testing such as
staff and supplies.
Indirect costs (overheads)
Costs associated with shared resources used by the entire
organization
Ex-costs associated with central services such as human resources
and finance
Cost Allocation
Assign all overhead costs to the departments that create the need
for such costs, typically the patient services departments.
Cost Pool
Overhead amount to be allocated.
Consists of the direct costs of one overhead department.
Ex- HR Cost.
cost driver
Basis on which the cost pool will be allocated.
Ex- the cost driver for facilities overhead (building space
depreciation, maintenance, utilities, and so on) might be the
, MHA 706 FINAL-LORD.Final Test 2026\2027.
amount of space used by each department that uses the
organization's facilities.
Cost Allocation Rate
dividing # of dollars in cash pool/total volume of cost driver
What makes a good cost driver?
Perceived as being fair and promote organizational cost
reduction.
Assume that the cost driver for Housekeeping Services is the
amount of space occupied. User departments in total occupy
200,000 square feet of space.
Direct cost allocation method
the costs of each support department are allocated directly to,
and only to, the patient services departments.
Step-down allocation method
allocates support-department costs to other support departments
and to operating departments in a sequential manner that
partially recognizes the mutual services provided among all
support departments
What is the most used Cost Allocation Method?
Step-down method is used more because it recognizes at least
some of those interest support department relationships. So, it's a
fairer in efficient way of doing the allocation.
Reciprocal allocation method
allocates support-department costs to operating departments by
fully recognizing the mutual services provided among all support
departments
