H F M A Exam Questions with
Complete Solutions68
Why is cost accounting so important in health care? - ANSWERS-Though costs have such a minor
role in deermining prices, cost accounting is very important in a healthcare organization.
Because reimbursment is predetermined, managment must focus primarily on finding ways
tomanage cosgts, so cost accougtning is critical. Cost information is uselful to a variety of key
decisionmakers in a healthcare organization. Different concepts of cost are required for different
purposes. Thefore it is imporant to understand the specific uniaue methodologies of cost
measurement
Incremental or marginal cost - ANSWERS-Incremental or marginal costs are used when costing
decisions are being made with the understanding that there is a difference in cost at two
different activity or volume levels
Contribution margin - ANSWERS-The contribution margin is the difference between marginal
revenue and marginal cost. The contribution margin equals the revenue received for one unit of
service less the marginal expenses incurred for one unit of service. The contribution margin is
the amount of revenues remaining after meeting marginal costs. Contribution margin goes
toward supporting fixed costs;if it exceeds that it goes to profit
Break even point - ANSWERS-The level of sales volume of a certain product producing the exact
amount of contribution margin needed to cover fixed costs
Total fixed cost/contribution margin per unit=break even point
Full absorption costing - ANSWERS-Full absorption costing attempts to allocate all overhead
costs to all activities supported by those costs. Overhead , or indirect costs, are allocated down
to the revenue producing activities based on an objective methodology.
,Differential costing - ANSWERS-Differential costing ignores the overhead costs and only looks at
incremental costs that are directly related to the product
Example - ANSWERS-The decision to use full absorption costing or differential cost is made
based on how the information will be used. For example, when management is assessing the
profitability of all hospital programs to one another , then it may be appropriate to consider
departmental costs on a full absorption basis . This may be an effective way to identify
marginally performing departments for further action.
If however the analysis was conducted to price a contract that would bring incremental volume,
but would required no additional investment of equipment or indirect labor, then it would be
appropriate to consider only marginal direct (differential) costs
Direct cost - ANSWERS-Direct costs may be fixed or variable but they are clearly
and directly associated with the activity that is being costed. Direct costs include for example
direct salaries and supplies
Indirect costs - ANSWERS-Indirect costs may also be fixed or variable but they are not clearly nor
directly associated with the activity being costed. Overhead is a common term for indirect costs.
Indirect costs are assigned to a service using some acceptable allocation method. An example
would include administration provided in a hospital setting.
Activity based costing - ANSWERS-Activity based costing is a method of determining product
costs using cost driver as or activity measures, that cause indirect costs to be incurred. Ideal cost
drivers are activities that pertain to each procedure in varying amounts.
ABC is generally considered a more accurate costing method than the proportionate allocation
method. It is how're often more expense to determine due to the necessary data collection
Example of abc - ANSWERS-An example of a b c would be using the level of a specific equipment
use to determine the allocation of depreciation and repair expense.
,Service line costing - ANSWERS-Health care organizations have developed product lines based
on major diagnostic categories for example diseases of the digestive system or obstetric
procedures.
The advantage of analyzing results by diagnostic category is that it develops an estimate of total
resources consumed, including resources consumed in shared departments.
Example of service line costing - ANSWERS-For example, the resources consumed by a cardiac
patient in an imaging department are considerably more than the resources consumed by a
patient with pneumonia
Profitability analysis of service line costing-several objectives - ANSWERS-1)shift financial
analysis toward the major lines
2)determine the advantages or disadvantages of being in that product line
3)emphasize or de-emphasize certain services
4)determine data for use in benchmarking among clinical specialties
Important ***** product line costing - ANSWERS-Product line costing can also be useful in
assessing the profitability of a proposed managed care contract and in developing carve out
rates for specific types of cases (for example open heart surgeries and bone marrow
transplants)
Identify the 3 main types of standards - ANSWERS-Learning objective
Responsibility accounting - ANSWERS-The assignment or allocation of cost to the individual
manager who is primarily responsible for making decisions a bout those costs. Once the primary
responsibility for incurring a specific cost has been established, various management reports
such as departmental expense reports can be developed to assess a managers effectiveness.
, Intro to standard costing system
2 principal uses for cost accounting: assist with price negotiations and identify opportunities to
enhance financial performance. - ANSWERS-Cost accounting is used for management decision
making . Th better the cost info the better the decision making
Standard costing systems - ANSWERS-1)predetermined or synthetic standard-arrived at by a
group or association of organizations with similar characteristics (for example a published
relative value scale)
2)negotiated or historical standard-based on historical data of the specific institution for which
the budget is intended
3)customized or engineered standard-based on detailed time or activity studies within a specific
department of a specific institution
Adv and disadvantage of predetermined or synthetic standard - ANSWERS-Advantages
Minimal development
Ease of development and implementation
Not based on specific items and not specific to an individual facility
Disadvantages
Not customized thus less precise
Not as well accepted
May not be applicable directly to an individual with in a specific facility
Advantages and disadvantages of negotiated or historical standard - ANSWERS-Advantages
Easy to develope
Less expensive
Less disruptive than a customized standard
Complete Solutions68
Why is cost accounting so important in health care? - ANSWERS-Though costs have such a minor
role in deermining prices, cost accounting is very important in a healthcare organization.
Because reimbursment is predetermined, managment must focus primarily on finding ways
tomanage cosgts, so cost accougtning is critical. Cost information is uselful to a variety of key
decisionmakers in a healthcare organization. Different concepts of cost are required for different
purposes. Thefore it is imporant to understand the specific uniaue methodologies of cost
measurement
Incremental or marginal cost - ANSWERS-Incremental or marginal costs are used when costing
decisions are being made with the understanding that there is a difference in cost at two
different activity or volume levels
Contribution margin - ANSWERS-The contribution margin is the difference between marginal
revenue and marginal cost. The contribution margin equals the revenue received for one unit of
service less the marginal expenses incurred for one unit of service. The contribution margin is
the amount of revenues remaining after meeting marginal costs. Contribution margin goes
toward supporting fixed costs;if it exceeds that it goes to profit
Break even point - ANSWERS-The level of sales volume of a certain product producing the exact
amount of contribution margin needed to cover fixed costs
Total fixed cost/contribution margin per unit=break even point
Full absorption costing - ANSWERS-Full absorption costing attempts to allocate all overhead
costs to all activities supported by those costs. Overhead , or indirect costs, are allocated down
to the revenue producing activities based on an objective methodology.
,Differential costing - ANSWERS-Differential costing ignores the overhead costs and only looks at
incremental costs that are directly related to the product
Example - ANSWERS-The decision to use full absorption costing or differential cost is made
based on how the information will be used. For example, when management is assessing the
profitability of all hospital programs to one another , then it may be appropriate to consider
departmental costs on a full absorption basis . This may be an effective way to identify
marginally performing departments for further action.
If however the analysis was conducted to price a contract that would bring incremental volume,
but would required no additional investment of equipment or indirect labor, then it would be
appropriate to consider only marginal direct (differential) costs
Direct cost - ANSWERS-Direct costs may be fixed or variable but they are clearly
and directly associated with the activity that is being costed. Direct costs include for example
direct salaries and supplies
Indirect costs - ANSWERS-Indirect costs may also be fixed or variable but they are not clearly nor
directly associated with the activity being costed. Overhead is a common term for indirect costs.
Indirect costs are assigned to a service using some acceptable allocation method. An example
would include administration provided in a hospital setting.
Activity based costing - ANSWERS-Activity based costing is a method of determining product
costs using cost driver as or activity measures, that cause indirect costs to be incurred. Ideal cost
drivers are activities that pertain to each procedure in varying amounts.
ABC is generally considered a more accurate costing method than the proportionate allocation
method. It is how're often more expense to determine due to the necessary data collection
Example of abc - ANSWERS-An example of a b c would be using the level of a specific equipment
use to determine the allocation of depreciation and repair expense.
,Service line costing - ANSWERS-Health care organizations have developed product lines based
on major diagnostic categories for example diseases of the digestive system or obstetric
procedures.
The advantage of analyzing results by diagnostic category is that it develops an estimate of total
resources consumed, including resources consumed in shared departments.
Example of service line costing - ANSWERS-For example, the resources consumed by a cardiac
patient in an imaging department are considerably more than the resources consumed by a
patient with pneumonia
Profitability analysis of service line costing-several objectives - ANSWERS-1)shift financial
analysis toward the major lines
2)determine the advantages or disadvantages of being in that product line
3)emphasize or de-emphasize certain services
4)determine data for use in benchmarking among clinical specialties
Important ***** product line costing - ANSWERS-Product line costing can also be useful in
assessing the profitability of a proposed managed care contract and in developing carve out
rates for specific types of cases (for example open heart surgeries and bone marrow
transplants)
Identify the 3 main types of standards - ANSWERS-Learning objective
Responsibility accounting - ANSWERS-The assignment or allocation of cost to the individual
manager who is primarily responsible for making decisions a bout those costs. Once the primary
responsibility for incurring a specific cost has been established, various management reports
such as departmental expense reports can be developed to assess a managers effectiveness.
, Intro to standard costing system
2 principal uses for cost accounting: assist with price negotiations and identify opportunities to
enhance financial performance. - ANSWERS-Cost accounting is used for management decision
making . Th better the cost info the better the decision making
Standard costing systems - ANSWERS-1)predetermined or synthetic standard-arrived at by a
group or association of organizations with similar characteristics (for example a published
relative value scale)
2)negotiated or historical standard-based on historical data of the specific institution for which
the budget is intended
3)customized or engineered standard-based on detailed time or activity studies within a specific
department of a specific institution
Adv and disadvantage of predetermined or synthetic standard - ANSWERS-Advantages
Minimal development
Ease of development and implementation
Not based on specific items and not specific to an individual facility
Disadvantages
Not customized thus less precise
Not as well accepted
May not be applicable directly to an individual with in a specific facility
Advantages and disadvantages of negotiated or historical standard - ANSWERS-Advantages
Easy to develope
Less expensive
Less disruptive than a customized standard
