Hospital Maintenance Cost Allocation: Assignment with ABC Approach

Summary

Hospital maintenance costs are usually shared between departments. Activity-based costing (ABC) is a way to allocate costs more fairly. Students see how to calculate maintenance costs for a hospital pharmacy.

Current Cost Allocation Method

Hospitals often allocate maintenance costs based on the size of each department. The pharmacy department is unhappy with this method. It thinks it pays too much for equipment repairs.

Activity-Based Costing Approach

The ABC approach allocates maintenance costs based on the actual use of maintenance services. The pharmacy department wants to use this approach. It thinks it will pay less for equipment repairs.

Calculations for Pharmacy Department

Students calculate maintenance costs for the pharmacy department. They use the current method and the ABC approach. They compare the two results.

Tables of Data

Tables show the volume of maintenance work, labour hours, labour costs, and supplies. Tables also show the size of each department. They show the volume of repairs, hours of repairs, and supplies used for repairs.

Key terms

Activity-based costing

A method of allocating costs based on the actual use of services.

Maintenance costs

The costs of keeping a hospital's buildings and equipment in good working order.

Routine maintenance

Regular work to keep a hospital's buildings and equipment in good working order.

Repairs

Work to fix a hospital's buildings and equipment when they break down.

Square feet

A measure of the size of a hospital department.

Cost allocation

The way a hospital shares maintenance costs between its departments.

Questions this document helps with

• How does the current method allocate maintenance costs between departments?
• What information does the ABC approach use to allocate costs?
• How do the maintenance costs for the pharmacy department change?

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