Cost allocation in a hospital assigns indirect costs to cost objects using drivers. Which of the following statements is correct?

• A. Directly charging each patient for all overhead.
• B. Randomly assigning indirect costs to departments.
• C. Only allocating direct costs to cost objects.
• D. Cost allocation assigns indirect costs (overhead) to cost objects (services, departments) using drivers.

Answer: (D)

Indirect costs (overhead) must be assigned to cost objects in a way that reflects how much of the hospital’s resources each object uses. That’s done with cost drivers—measurable factors that relate to resource consumption, such as patient days, procedures performed, or space used. By calculating a rate per unit of driver and applying it to each department or service based on how many units of the driver they consume, overhead is allocated fairly and realistically. This approach contrasts with charging every patient for all overhead, which ignores shared resources; randomly assigning overhead, which lacks a systematic basis; or only allocating direct costs and ignoring overhead altogether.