The Case of Support Department Cost Allocations and Wellwood Hospital
Jenni Largent, cost accountant at Wellwood Community Hospital, waited while her computer logged into the hospital information system. The system was running a bit slow this morning and it was taking a while to authenticate. Her plan for the morning was to download the three reports the controller, Stacy Wong, had pointed her to, in order to start reviewing the cost allocation method for the hospital’s supporting departments. At least one manager (Alice Piedmont – Surgery Manager), felt that the current direct allocation method disadvantaged her department, so Largent had been tasked with comparing the direct allocation method with the step method, which may allocate less cost to Piedmont (Exhibit 1).
Wellwood Community Hospital
Wellwood Community Hospital (Wellwood) is a community-based hospital offering both inpatient and outpatient services. It’s 100-person medical staff provides adult and pediatric care, including emergency services, therapy services (e.g., occupational and physical therapy), general surgery, and other essential services for the Wellwood community of roughly 100,000 residents.
Wellwood also has a number of supporting departments, which are not directly responsible for patient care (e.g., Medical Records and Human Resources). These departments provide critical services to make sure the hospital can continue operations.
Wellwood has a typical organizational structure, with four C-level executives, including the Chief Financial Officer, the Chief Operating Officer, and the Chief Nursing Officer (all reporting to the Chief Executive Officer). The controller (Stacy Wong) reports directly to the Chief Financial Officer and supervises a group of 9 finance and accounting professionals, who are responsible for external reporting, internal reporting, and decision support. Jenni is a freshly hired cost accountant and analyst with no experience. She reports directly to Stacy Wong.
On the line side, 12 Department Managers report to the Chief Operating Officer. Financially, the most important of these departments is General Surgery, which is headed by Alice Piedmont, who has 15 years of experience, with the last 5 being in her current position at Wellwood.
Cost Allocation Practices
Wellwood currently uses the direct method to allocate the costs of supporting departments to producing departments. This method was adopted over 20 years ago because producing (i.e., patient care) department managers found the method reasonable, and the accounting department found the resulting allocations easy to explain and report to line managers.
Over time, however, various department managers at Wellwood have questioned the method. Most recently (and vocally), Alice Piedmont complained that the current monthly cost allocation to the Surgery department is unreasonable. She has become increasingly frustrated, and Wellwood’s CEO has expressed concern that she might leave Wellwood for an open position at another hospital. (The cost allocation isn’t the only issue that she has complained about, but it is a significant one.) In a standing meeting between the CFO and Stacy Wong, the CFO relayed the CEO’s concerns regarding Piedmont and suggested that Stacy “look into the impact of changing to the step-method, especially as it relates to General Surgery.”
Changing the cost allocation method is a thorny issue, as it would affect all of the patient care (i.e., “producing”) departments in a “zero-sum game.” Nevertheless, Piedmont’s concerns may reflect true unfairness in the current allocation structure. Further, if Piedmont leaves her position for a competitor, it could have extremely negative consequences for Wellwood Hospital.
Part 1 Requirements
Review Stacy’s e-mail and the attached files. Import the data files into Excel and try to gain an understanding of what is contained in each file. Answer the following questions about the data files prior to class on March 7. Bring your answers to class.
How many producing departments are at Wellwood Hospital?
How many supporting departments are at Wellwood Hospital?
Which supporting department has the most cost to allocate to producers?
In 2022, how much total cost should have been allocated to producing departments using the direct method?
In 2022, how much total cost would be allocated to producing departments using the step method?
Be prepared to contribute to a general discussion about Stacy’s request for analysis and the potential change in allocation method at Wellwood. Also, be prepared to contribute to a discussion that addresses the following questions.
How should Jenni respond to Stacy’s e-mail?
What will be your analysis plan?
part 2 requirement is in the attached documents
