HFMA
Why is cost accounting so important in health care? - answersThough 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 - answersIncremental 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 - answersThe 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 - answersThe 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 - answersFull 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 - answersDifferential costing ignores the overhead costs and only
looks at incremental costs that are directly related to the product
Example - answersThe 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 - answersDirect 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 - answersIndirect 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 - answersActivity 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 - answersAn 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 - answersHealth 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 - answersFor 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 - answers1)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 - answersProduct 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 - answersLearning objective
Responsibility accounting - answersThe 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. - answersCost accounting is used for
management decision making . Th better the cost info the better the decision making
Standard costing systems - answers1)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 - answersAdvantages
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 -
answersAdvantages
Easy to develope
Less expensive
Less disruptive than a customized standard
Department involvement and understanding may be better than with a predetermined
standard, but less than with a customized standard
Disadvantages
Less precise than customized standards
Difficult to obtain agreement for change predictions based on historical results
Advantages and disadvantages customized or engineered standard -
answersAdvantages
More precise
More supportable by individual data specific to the entity
Offer the opportunity for departmental improvement becuase they are based on actual
activity or procedure at hand
Disadvantages
Very expensive
Time consuming to develope
Difficult to understand
Obj: to recognize the four types of individual cost behaviors - answers
Variable cost - answers-responds, in total more or less in direct proportion to changes in
volume
-an example is the relationship between supply costs and outpatient or patient days. For
out hgealthcare organizations, majority of supply costs will vary directly with volume
Fixed cost pattern - answersCosts that in the short run do not change with changes in
volume
'-examples would be depreciation, long term lease expense, or amortization of incurred
financing costs
Semi variable cost patters - answersCosts that vary in direct relation to volume after a
minimal level of activity has been reached.
-an example of semi variable cost behavior in healthcare organizations is the telephone
expense, where a monthly access and service charge is paid initially, no matter wha the
Why is cost accounting so important in health care? - answersThough 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 - answersIncremental 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 - answersThe 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 - answersThe 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 - answersFull 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 - answersDifferential costing ignores the overhead costs and only
looks at incremental costs that are directly related to the product
Example - answersThe 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 - answersDirect 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 - answersIndirect 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 - answersActivity 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 - answersAn 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 - answersHealth 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 - answersFor 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 - answers1)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 - answersProduct 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 - answersLearning objective
Responsibility accounting - answersThe 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. - answersCost accounting is used for
management decision making . Th better the cost info the better the decision making
Standard costing systems - answers1)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 - answersAdvantages
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 -
answersAdvantages
Easy to develope
Less expensive
Less disruptive than a customized standard
Department involvement and understanding may be better than with a predetermined
standard, but less than with a customized standard
Disadvantages
Less precise than customized standards
Difficult to obtain agreement for change predictions based on historical results
Advantages and disadvantages customized or engineered standard -
answersAdvantages
More precise
More supportable by individual data specific to the entity
Offer the opportunity for departmental improvement becuase they are based on actual
activity or procedure at hand
Disadvantages
Very expensive
Time consuming to develope
Difficult to understand
Obj: to recognize the four types of individual cost behaviors - answers
Variable cost - answers-responds, in total more or less in direct proportion to changes in
volume
-an example is the relationship between supply costs and outpatient or patient days. For
out hgealthcare organizations, majority of supply costs will vary directly with volume
Fixed cost pattern - answersCosts that in the short run do not change with changes in
volume
'-examples would be depreciation, long term lease expense, or amortization of incurred
financing costs
Semi variable cost patters - answersCosts that vary in direct relation to volume after a
minimal level of activity has been reached.
-an example of semi variable cost behavior in healthcare organizations is the telephone
expense, where a monthly access and service charge is paid initially, no matter wha the
