Description
first read ch 2 then do problem 1please give the answer in word docif u have any question let me know
Unformatted Attachment Preview
Cost Definitions
Cost Definitions
1
Cost Definitions
•
•
•
•
•
•
•
Definition and Characteristics of Costs
Marginal Analysis
Cross-subsidization of Costs
True Cost, Economic Cost, and Accounting Cost
The Long-Term versus the Short-Term
Departmental versus Product-Line Costing
External Costs
Cost Definitions
2
Definition and Characteristics of
Costs
• Full Costs, Average Costs, Cost Objectives,
Direct Costs, and Indirect Costs
• Types of Costs: Fixed, Variable, and
Marginal
• Marginal Cost Pricing
Cost Definitions
3
Definition and Characteristics of Costs
Full Costs, Average Costs, Cost Objectives,
Direct Costs, and Indirect Costs
• What does it cost to treat?
–
–
–
–
an average managed care patient?
a specific type of Medicare patient?
a patient at ABC hospital?
a patient with pneumonia?
• The response is, “It depends; why you want to
know?”
Cost Definitions
4
Definition and Characteristics of Costs
Full Costs, Average Costs, Cost Objectives,
Direct Costs, and Indirect Costs (continued)
• See Exhibit 2-1 for all cost definitions (p.15)
• Cost objective: any particular item for which we
wish to know the cost. It may be a specific
patient, a class of patients, a service, a department,
or an entire organization
• Full cost
• Average cost
• Direct cost
• Indirect cost
Cost Definitions
5
Exhibit 2-1 Cost Definitions
Cost Definitions
6
Exhibit 2-1 Cost Definitions (continued)
Cost Definitions
7
Definition and Characteristics of Costs
Types of Costs: Fixed, Variable, and
Marginal
• Fixed costs
– Tend to remain constant over the course of many
accounting or reporting periods
– Are not influenced by changes in volume or intensity of
service
– Appear as the flat horizontal line in graphic form
$
Fixed cost
A
Number of Procedures
Cost Definitions
8
Definition and Characteristics of Costs
Types of Costs: Fixed, Variable, and
Marginal
• Variable Costs
– Rise and fall in relation to changes in the level
of activity
$
Variable cost
C
Number of Procedures
Cost Definitions
9
Table 2-1 Full Costs of Lithotripsy
Variable
Cost
Total
Fixed
Per
Variable
Full
Volume
Cost
Patient
Cost
Cost
(A)
(B)
(C )
(D) = (A) x (C ) (E) = (B) + (D)
———————- ————- ———————– ——————– ————250
$200,000
$200
50000
$250,000
1000
$200,000
$200
200000
$400,000
2000
$200,000
$200
400000
$600,000
Acquisition cost $1,000,000
Useful life:
Depreciation:
Variable cost:
5 years
$200,000
$200 per patient
Cost Definitions
10
Table 2-2 Average Costs of Lithotripsy
Fixed
Variable
Cost
Cost
Fixed
Per
Per
Average
Volume
Cost
Patient
Patient
Cost
(A)
(B)
(C ) = (B) / (A)
(D)
(E) = (C) + (D)
———————- ————- ———————— ——————– ————250
$200,000
$800
$200
$1,000
1000
$200,000
$200
$200
$400
2000
$200,000
$100
$200
$300
Cost Definitions
11
Definition and Characteristics of Costs
Types of Costs: Fixed, Variable, and
Marginal
• Semivariable Costs:
– Are partially fixed and partially variable, i.e.,
are fixed over a certain range of volume and
then variable up to the next range of volume
– Are applied to workers who are able to deal
with a range of workload
– Understanding the performance of semivariable
costs is important to the decision-making
process related to productivity
Cost Definitions
12
Definition and Characteristics of Costs
Types of Costs: Fixed, Variable, and
Marginal
• Marginal Costs:
– Are defined as the change in cost related to a change in
activity
– Are often referred to as incremental or out-of-pocket costs
– Are often equal to variable costs, but they are not
synonymous with them
– May include not only the variable cost but also the cost of
acquiring another equipment
• Decision making should be based on the difference
between marginal costs and added revenues
Cost Definitions
13
Marginal Analysis
• Refers to the technique of considering only
incremental data as part of a financial analysis or
decision process
• Reduces the scope of supportive analytical work
and focuses attention on the financial reality of the
decision itself, not the overall financial condition
after a decision has been made
Cost Definitions
14
Marginal Analysis (continued)
Table 2-3 Marginal Analysis of Lithotripsy with additional business
Operating Facts
Humana offers a purchase of additional 1,000 cases, but is willing to pay only
$250 per case
New revenue rate
Variable cost
Additional volume
$250
$200
1,000
Marginal Analysis
Extra revenue
Extra cost
Extra fixed cost
Extra variable cost (1,000x$200)
Extra expense
Increase in income/loss
Cost Definitions
$250,000
$0
$200,000
$200,000
$50,000
15
Marginal Analysis
Profit and Loss of Lithotripsy (continued)
Variable
Revenue
Total
Frofit
Full
Per
Patient
or
Cost
Cost
Patient
Revenue
Loss
(D) = (A) x (C )
(E) = (B) + (D)
(F)
Cost
Total
Fixed
Per
Variable
Volume
Cost
Patient
(A)
(B)
(C )
(G) = (A) x (F) (H) = (G) – (E)
——————– ————————————– ————- ————- ————250
$200,000
$200
50,000
$250,000
$400
100,000
-$150,000
1000
$200,000
$200
200,000
$400,000
$400
400,000
$0
2000
$200,000
$200
400,000
$600,000
$400
800,000
$200,000
Cost Definitions
16
Cross-subsidization of Costs
• No cross-subsidization between patients with true
cost
Full Cost
$20,000
Patient A
True Cost
$5,000
Patient B
True Cost
$15,000
Revenue
True cost
Net Income
Cost Definitions
Patient A
Patient B
$5,000
-$5,000
$0
$15,000
-$15,000
$0
17
Cross-subsidization of Costs (continued)
• Existing cross-subsidization between patients with
average cost
Full Cost
$20,000
Patient A
Assigned
Cost $10,000
Patient B
Assigned
Cost $10,000
Patient A
Patient B
Revenue
$10,000
Assgined cost -$10,000
Net Income
$0
$10,000
-$10,000
$0
Cost Definitions
18
Cross-subsidization of Costs (continued)
• Existing cross-subsidization between Medicare
patients with true cost
Full Cost
$20,000
Patient A
True Cost
$5,000
Patient B
True Cost
$15,000
DRG Revenue
True cost
Net Income
Cost Definitions
Patient A
Patient B
$10,000
-$5,000
$5,000
$10,000
-$15,000
-$5,000
19
True Cost, Economic Cost, and
Accounting Cost
•
•
•
•
True Cost
Economic Cost
Accounting Cost
Joint Cost
Cost Definitions
20
Departmental vs. Product-Line
Costing
• Responsibility centers:
– Cost centers (support cost centers)
– Revenue centers
• Responsibility centers = Departments
• Departmental costing
–
–
–
–
Direct labor
Direct materials
Department indirect costs
Other indirect overhead costs
Cost Definitions
21
A Typical Departmental Revenue and Costing Report
MAKE BELIEVABLE MEDICAL CENTER
DEPARTMENTAL PERFORMANCE REPORT
DECEMBER 31, 20XX
CURRENT MONTH
ACTUAL
YEAR TO DATE
$100,000
50,000
$150,000
DESCRIPTION
ACTUAL BUDGET VARIANCE
DEPARTMENT REVENUES
-$30,000
TOTAL INPATIENT
$600,000 $600,000
$0
0
TOTAL OUTPATIENT
320,000
300,000
20,000
-$30,000 TOTAL PATIENT REVENUES $920,000 $900,000
$20,000
$70,000
10,000
17,000
16,000
13,000
4,000
$130,000
$70,000
10,000
20,000
20,000
15,000
5,000
$140,000
DIRECT EXPENSES
$0
TOTAL SALARIES
$428,000
0 TOTAL EMPLOYEE BENEFITS 62,000
-3,000
TOTAL SUPPLIES
125,000
-4,000 TOTAL PURCHASED SERVICES 118,000
-2,000
TOTAL REPAIRS
88,000
-1,000 TOTAL OTHER EXPENSES
29,000
-$10,000 TOTAL DIRECT EXPENSES $850,000
-$10,000
$10,000
$70,000
50,000
$120,000
BUDGET VARIANCE
-$20,000
INCOME CONTRIBUTION
Cost Definitions
$70,000
$420,000
60,000
120,000
120,000
90,000
30,000
$840,000
$8,000
2,000
5,000
-2,000
-2,000
-1,000
$10,000
$60,000
$10,000
22
Departmental vs. Product-line
Costing
• Product-Line costing
Table 2-3 Chest X-Ray Cost
Average
Tuberculosis Cardiac Surgery
Patient
Patient
Patient
Chest X-ray
————- ——————— ——————– ——– ————- ——– ————Technician labor @ $30/hour
$3
$15
$9
X-ray film
25
25
25
12
12
Other costs
12
$46
$52
Total
$40
Cost Definitions
23
Laboratory A Monthly Costing Report
Direct expenses
Salaries and wages
Supervisors
Lab. Technicians – Senior
Lab. Technicians – Junior
Lab. Assistant
Clerks
Supplies
Non-medical
Medical
Other direct expense
Total direct expenses
Support expenses (transferred)
Housekeeping
Laundry and linen
Maintenance and repair
Dietary
Total transferred expense
Support expenses (allocated)
Administrative and general
Personnel
Total allocated expense
Total department expenses
Amount
$3,675
5,075
4,536
4,872
1,260
1,825
3,350
1,545
26,138
2,760
2,275
2,120
5,325
12,480
3,312
925
$4,237
$42,855
Cost Definitions
24
Laboratory A Monthly Services Report
Procedure name
Blood glucose
Blood sodium
Blood potassium
Blood bicarbonate
Platelet
Reticulocyte
Blood iron
Urine glucose
.
.
.
.
Total
Quantity
112
25
75
35
7
3
10
12
.
.
.
.
Procedure name
Blood glucose
Blood sodium
Blood potassium
Blood bicarbonate
Platelet
Reticulocyte
Blood iron
Urine glucose
.
.
.
.
Cost
?
?
?
?
?
?
?
?
.
.
.
.
3,455
Cost Definitions
25
Departmental vs. Product-line
Costing
• Hybrid approaches
– Seek a balance between the departmental
costing needed for responsibility accounting
and the product costing needed for effective
product decisions
Cost Definitions
26
Assignment
• Problem 1 on pages 31-32
Cost Definitions
27
PROBLEMS
1. Your organization (City Rehab) has been per visit. City Rehab currently receives $95
approached by an MCO looking for an ex- per visit directly from Medicare. City
clusive arrangement for the rehabilitation Rehab provides 1,500 hip replacement vis-
of its hip replacement patients. The MCO is its per year and has the capacity to handle
aggressively positioning itself to compete in 500 more easily without adding any staff or
the growing Medicare managed care seg. equipment. The fixed costs associated with
ment. They have offered to guarantee 1000 hip replacement rehab are $7,500 and the
patient visits per year and want to pay $70 variable costs are $67 per visit.
Copyrighted material
32
CHAPTER 2 COST DEFINITIONS
a. What is City’s current average cost per
hip replacement visit?
b. Should you take the MCO’s offer? If so,
why? If not, why not?
c. What if the MCO wanted to pay City a
flat amount ($4) for each of its 10,000
Medicare covered lives, regardless of
how many patients/visits ultimately
came in for hip replacement rehabilita-
tion (capitation). What additional infor-
mation would you need to determine
whether or not City Rehab should go
ahead with this deal?
2. Select another area for a health care organ-
ization, and describe the various parts of a
product costing-oriented data collection.
3. Select a department of a health care organi-
zation, and develop a departmental ap-
proach to costing for that department.
| Acti
Go to
Purchase answer to see full
attachment
