Wellspring has determined that the cost driver for housekeeping is square feet and that the cost driver for Administration and Financial Services is the number of employees. Using the direct method of cost allocation, what is the approximate allocation rate for housekeeping costs (round to the nearest cent)

$2.15

Explanation:

To understand how we get this allocation rate for housekeeping costs, we need to understand the “direct method of cost allocation”.

In direct method of cost allocation, the overheads of all service/supporting department are distributed directly to the Production/patient service department ignoring services rendered to other service dept.

Hence, the Housekeeping Departments Costs will be directly allocated to Medicine and Surgery Department by taking the cost driver as Square feet.

Total Square Feet of Medicine and Surgery Department = 53,000 + 40,000 = 93,000 square feet

Total Cost of Housekeeping Department = $200,000

Allocation Rate = Total Cost of Housekeeping Dept 200,000 / Total Square Feet 93,000 = $2.15 per square feet

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