Cost allocation in hospitals, alternative allocation criteria. Dave Meltzer vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Meltzer’s insurance company received a $4,800 bill for his two-day stay. One item that caught Meltzer’s attention was an $11.52 charge for a roll of cotton. Meltzer is a salesman for Johnson & Johnson and knows that the cost to the hospital of the roll of cotton is in the $2.20 to $3.00 range. He asked for a breakdown of the $11.52 charge. The accounting office of the hospital sent him the following information:

	Invoiced cost of cotton roll	$ 2.40
	Cost of processing of paperwork for purchase	0.60
	Supplies-room management fee	0.70
	Operating-room and patient-room handling costs	1.60
	Administrative hospital costs	1.10
	University teaching-related costs	0.60
	Malpractice insurance costs	1.20
	Cost of treating uninsured patients	2.72
	Profit component	0.60
	Total	$11.52

Meltzer believes the overhead charge is obscene. He comments, “There was nothing I could do about it. When they come in and dab your stitches, it’s not as if you can say, ‘Keep your cotton roll. I brought my own.’”

1. Compute the overhead rate Sierra University Hospital charged on the cotton roll. Required

2. What criteria might Sierra use to justify allocation of the overhead items b–i in the preceding list?

Examine each item separately and use the allocation criteria listed in your answer.

3. What should Meltzer do about the $11.52 charge for the cotton roll?