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Cost information is an important part of the financial system of a healthcare organization. As Cleverley and Cleverley (2018) explain,
Cost information is produced through an entity’s cost accounting system. In most situations, cost information is shaped by the financial accounting system and the generally accepted principles of financial accounting on which financial accounting is based. However, cost information must be flexible, because it usually provides information for identifiable and specific decision-making groups, such as budgetary cost variance reports to department managers, cost reports to third-party payers, and forecasted project cost reports to planning agencies. (p. 336)
Additionally, various concepts of cost need to be considered for different decision-making purposes.
In your initial post,
Discuss the four major categories of cost as they relate to
traceability to the object being costed.
behavior of cost to output or activity.
management responsibility for control.
future cost versus historical cost.
Describe the three basic questions that must be addressed before effective cost accounting systems for healthcare organizations can become a reality.
Define the two possible theories that may be used to detect out-of-control costs.
Behavior of Cost to Output or Activity
Fixed costs remain constant regardless of the volume of services provided or the level of activity. The rent for a hospital building is a fixed cost because it does not change whether the hospital treats 100 or 1,000 patients.
Variable costs change in direct proportion to the volume of services or activity. The cost of a surgical glove is a variable cost because it is incurred for each surgical procedure performed.
Semi-variable costs have both a fixed and a variable component. A classic example is a salesperson's salary, which might include a fixed base salary plus a commission based on sales volume.
3. Management Responsibility for Control
Controllable costs are expenses that a specific manager or department head can influence or change within a given time frame. For example, a hospital department manager has control over their department's labor costs by deciding on staffing levels and overtime.
Non-controllable costs are expenses that a manager has no direct authority over. The cost of hospital-wide liability insurance is a non-controllable cost for a specific department head.
4. Future Cost Versus Historical Cost
Historical costs are costs that have already been incurred and are recorded in the financial statements. They represent the actual expenditures for past activities. The purchase price of medical equipment is a historical cost.
Sample Answer
Categories of Cost and Cost Accounting
Cost is a fundamental concept in healthcare financial management, and it can be categorized in different ways depending on the purpose of the analysis. Understanding these categories is crucial for effective decision-making.
1. Traceability to the Object Being Costed
Direct costs are expenses that can be directly and easily traced to a specific product, service, or department. For example, the salary of a nurse working exclusively in the intensive care unit (ICU) is a direct cost to the ICU department.
Indirect costs, also known as overhead, are costs that cannot be directly linked to a specific cost object. These are costs that are shared across multiple departments or services. For instance, the cost of electricity for the entire hospital is an indirect cost that must be allocated to each department based on a reasonable method.