LSUS MHA 706 MIDTERM EXAM STUDY GUIDE 2026
Comprehensive Practice Questions & Verified Answers
Louisiana State University Shreveport – Master of Health
Administration
Financial Management, Healthcare Systems & Strategic Decision-
Making
SECTION 1: COST ACCOUNTING & ALLOCATION
(Questions 1-30)
Question 1
What is the formula used to calculate the Allocation Rate in cost accounting?
A) Total Cost Pool / Total Revenue of the Organization
B) Dollars in the Cost Pool / Total Volume of Cost Driver
C) Direct Costs / Indirect Costs
D) Total Expenses / Number of Departments
Correct Answer: B
Rationale: The allocation rate is determined by dividing the dollars in the cost pool (the
total overhead or shared costs to be allocated) by the total volume of the cost driver
(the measure of activity that drives the cost). This provides the rate used to allocate
,overhead costs from support departments to revenue-producing departments. The
allocation rate formula is central to the cost allocation process in healthcare
organizations and ensures that the overhead costs are fairly distributed among the
departments that benefit from the shared resources.
Question 2
Which of the following is NOT a type of allocation method used in cost accounting?
A) Direct Method
B) Step-Down Method
C) Step-Up Method
D) Reciprocal Method
Correct Answer: C
Rationale: The Step-Up Method is not a recognized allocation method. The three
primary allocation methods used in healthcare cost accounting are the Direct Method
(allocates support department costs directly to revenue-producing departments), the
Step-Down Method (allocates costs sequentially from support departments to other
support departments and then to revenue departments), and the Reciprocal Method
(the most complex approach that recognizes mutual services provided among support
departments).
Question 3
Dollars in the Cost Pool divided by Total Volume of Cost Driver determines the:
A) Direct Cost Rate
B) Allocation Rate
,C) Overhead Rate
D) Revenue Rate
Correct Answer: B
Rationale: The allocation rate is calculated by dividing the total dollars in the cost pool
(overhead amount) by the total volume of the cost driver. This rate is then applied to
each department's usage of the cost driver to determine the amount of overhead cost
allocated to that department. A cost pool represents the overhead amount to be
allocated, while the cost driver is the basis on which the cost pool will be allocated.
Question 4
Support (overhead) departments are often called:
A) Revenue Centers
B) Patient Service Departments
C) Cost Centers
D) Profit Centers
Correct Answer: C
Rationale: Overhead departments are often called cost centers. They provide services
that support the organization's core operations but do not directly generate revenue.
Patient Service Departments are often called revenue centers because they generate
revenue through patient care. The goal of cost allocation is to distribute costs from cost
centers (support departments) to revenue centers (patient service departments) to
determine the true cost of providing care.
, Question 5
Patient Service Departments are often called:
A) Cost Centers
B) Support Departments
C) Revenue Centers
D) Overhead Departments
Correct Answer: C
Rationale: Patient service departments are often called revenue centers because they
generate revenue for the organization. These departments provide direct patient care
services and bill for these services. The allocation of costs from support departments to
revenue centers is essential for determining the profitability of different service lines and
setting appropriate prices.
Question 6
Effective cost drivers should have which of the following characteristics?
A) Promote organizational cost reduction and be perceived as fair
B) Be based on arbitrary allocation
C) Minimize departmental interactions
D) Ignore service complexity
Correct Answer: A
Rationale: Effective cost drivers should promote organizational cost reduction and be
perceived as being fair. A good cost driver creates incentives for efficient resource use
(organizational cost reduction) while ensuring that departments are fairly charged for
the shared resources they consume. When cost drivers are perceived as fair, department
managers are more likely to accept the allocations and take responsibility for their costs.
Comprehensive Practice Questions & Verified Answers
Louisiana State University Shreveport – Master of Health
Administration
Financial Management, Healthcare Systems & Strategic Decision-
Making
SECTION 1: COST ACCOUNTING & ALLOCATION
(Questions 1-30)
Question 1
What is the formula used to calculate the Allocation Rate in cost accounting?
A) Total Cost Pool / Total Revenue of the Organization
B) Dollars in the Cost Pool / Total Volume of Cost Driver
C) Direct Costs / Indirect Costs
D) Total Expenses / Number of Departments
Correct Answer: B
Rationale: The allocation rate is determined by dividing the dollars in the cost pool (the
total overhead or shared costs to be allocated) by the total volume of the cost driver
(the measure of activity that drives the cost). This provides the rate used to allocate
,overhead costs from support departments to revenue-producing departments. The
allocation rate formula is central to the cost allocation process in healthcare
organizations and ensures that the overhead costs are fairly distributed among the
departments that benefit from the shared resources.
Question 2
Which of the following is NOT a type of allocation method used in cost accounting?
A) Direct Method
B) Step-Down Method
C) Step-Up Method
D) Reciprocal Method
Correct Answer: C
Rationale: The Step-Up Method is not a recognized allocation method. The three
primary allocation methods used in healthcare cost accounting are the Direct Method
(allocates support department costs directly to revenue-producing departments), the
Step-Down Method (allocates costs sequentially from support departments to other
support departments and then to revenue departments), and the Reciprocal Method
(the most complex approach that recognizes mutual services provided among support
departments).
Question 3
Dollars in the Cost Pool divided by Total Volume of Cost Driver determines the:
A) Direct Cost Rate
B) Allocation Rate
,C) Overhead Rate
D) Revenue Rate
Correct Answer: B
Rationale: The allocation rate is calculated by dividing the total dollars in the cost pool
(overhead amount) by the total volume of the cost driver. This rate is then applied to
each department's usage of the cost driver to determine the amount of overhead cost
allocated to that department. A cost pool represents the overhead amount to be
allocated, while the cost driver is the basis on which the cost pool will be allocated.
Question 4
Support (overhead) departments are often called:
A) Revenue Centers
B) Patient Service Departments
C) Cost Centers
D) Profit Centers
Correct Answer: C
Rationale: Overhead departments are often called cost centers. They provide services
that support the organization's core operations but do not directly generate revenue.
Patient Service Departments are often called revenue centers because they generate
revenue through patient care. The goal of cost allocation is to distribute costs from cost
centers (support departments) to revenue centers (patient service departments) to
determine the true cost of providing care.
, Question 5
Patient Service Departments are often called:
A) Cost Centers
B) Support Departments
C) Revenue Centers
D) Overhead Departments
Correct Answer: C
Rationale: Patient service departments are often called revenue centers because they
generate revenue for the organization. These departments provide direct patient care
services and bill for these services. The allocation of costs from support departments to
revenue centers is essential for determining the profitability of different service lines and
setting appropriate prices.
Question 6
Effective cost drivers should have which of the following characteristics?
A) Promote organizational cost reduction and be perceived as fair
B) Be based on arbitrary allocation
C) Minimize departmental interactions
D) Ignore service complexity
Correct Answer: A
Rationale: Effective cost drivers should promote organizational cost reduction and be
perceived as being fair. A good cost driver creates incentives for efficient resource use
(organizational cost reduction) while ensuring that departments are fairly charged for
the shared resources they consume. When cost drivers are perceived as fair, department
managers are more likely to accept the allocations and take responsibility for their costs.
