Classifying costs
The most significant reason for classifying costs in different ways is to allocate them in a manner that allows patients to only pay for products and services rendered to them. These classifications enable managers to successfully control the indirect and direct costs and check the profit benefits of such operations and activities. Cost classification further helps managers and other financial personnel to calculate the efficiency of the healthcare system and facilitate necessary changes. Moreover, classifying costs plays a crucial role in determining the price of a particular diagnostic product. Organizing costs basing on behavior assist managers in analyzing the value, volume, and profit relationship. The management can, therefore, make sound decisions on which alternative is relevant for the identified costs.
Healthcare providers do not provide a bill for every service they provide to a patient since some of them are indirect, like the heating and cooling expenses. The management allocates such costs to the bill generation centers within the healthcare organization. After assigning these costs, the administration then evolves a way of assembling both indirect and direct costs clearly and purposefully.
Responsibility costing is a method of assembling in which the manager is held accountable for the number of costs they control. The process assembles charges through a cost center or department. In this method, the medical management can hold managers responsible for the controllable expenses incurred in the organization. Secondly, a full accounting is another method of assembly that involves the accounting of both direct and all allocated indirect expenses of a particular good or service to determine its profit value. Thirdly, differential costing consists of assembling costs and other revenues about alternative decisions. Differential costing does not account for sunk costs since they are not to occur in the future. Collecting these costs enables healthcare management to subject every individual departmental manager to account for the expenses that directly affect their specific cost centers. The approach further helps management to provide a comprehensive bill to patients involving only those costs subjected to the particular patient.
In selecting the best alternative cost, differential costing involves various steps. The method assigns all costs and revenues to make choices between different alternatives. The approach will apply in the following ways.
Expanding an existing service: Variable costs and revenues must increase rapidly than fixed costs.
Decreasing an existing service: Revenue and variable costs reduce in almost the same proportions. What about the fixed expenses?
Starting a new service: At what stage will products produce profits to cover the fixed costs?
Closing an existing service: Variable costs and revenue terminates. What effect will the fixed cost structure experience?
Firstly, the ACA will expand the numbers of patients under insurance. Given the possibility to treat the new volume using the current cost structure, the providers should perform well even as the insurance authority restricts the volume increase below inflation situation. Mostly, many insured will embrace capitation hence making utilization more important than costs. The costing methods will be on activity-based- accounting in a bid to lower all costs using value-based purchases.
Both the two breakeven points locate the point where fixed costs are constant. The two breakeven points then provide a clear base on identifying the stage at which the product or service starts generating revenue. Organizations can use the breakeven point per period to ascertain the performance of the products sold to the patients in a specified time. Additionally, both the per period and per unit of service points consider variable costs to a constant.
Quiz 1.
Activity-based costing
Activity
Projected volumes
Labor expense ($)
Supply Expense ($)
Visit minutes
Evaluation
4,000
30
10
60
Education
3,000
50
20
40
Exercise
2,000
05
00
90
Indirect costs = $ 300,000
Direct cost = $ 300,000
RVU and total cost driver for each activity= total direct cost/ GCD
Evaluation= 40/ 5 = 8
Education = 70/ 5 = 14
Exercise = 05/ 5 = 1
Divide total indirect cost by GCD
Evaluation = 60/ 10 = 6
Education = 40/ 10 = 4
Exercise = 90/ 10 = 9
Calculate total RVUs = RVU * volumes
Evaluation = 8* 4,000 = 32,000
Education = 14* 3,000= 42,000
Exercise = 1* 2,000 = 2,000
Projected cost drivers= RVUs* projected volume
32,000 +42,000 + 2,000 = 74,000.
Direct costs per RVU= direct costs/ total RVUs
= 300,000/ 74,000
= 4.054
Direct cost per activity= direct cost per RVU* RVU in each activity
Evaluation = 4.05 * 8 = 32.4
Education = 4.05 * 14 = 56.7
Exercise = 4.05* 1= 4.05
Quiz 2.
Breakeven analysis
Fixed cost = $ 10,000
Selling price = $ 100
Variable cost = $ 20
Contribution margin percent = charge -variable cost/ charge
= (100-20) / 100
= 80 %
Breakeven point = Total fixed cost/ contribution margin percentage
= 10,000/ 0.8
= $ 12,500