Fixed Costs
Posted on March 29, 2009 - Filed Under Finance
Some costs, called fixed costs, are more or less known with certainty, regardless of the level of volume within the relevant range. For example, the clinic has a labor force of well-trained permanent employees that would be increased or decreased only under unusual circumstances. Thus, as long as volume falls
within the relevant range, labor costs at Northside Clinic are fixed for the coming year regardless of the number of patient visits. Other examples of fixed costs include expenditures on facilities, diagnostic equipment, information systems, and the like. After an organization has acquired these assets, they
typically are locked into them for some period of time, regardless of volume. Of course, no costs are fixed over the long run. At some point of increasing volume, healthcare businesses must incur additional fixed costs for new property and equipment, additional staffing, and so on. Likewise, if volume shrinks
enough, an organization likely would reduce fixed costs by shedding part of its fixed assets and labor base.
Variable Costs
Whereas some costs are fixed regardless of volume, other resources are more or less consumed as volume dictates. Costs that are directly related to volume are called variable costs. For example, the costs of the clinical supplies (e.g., rubber gloves, tongue depressors, hypodermics, and so on) used by Northside would be classified as variable costs. Also, some of the diagnostic equipment used in the clinic may be leased on a per procedure basis, which would convert the cost of the equipment from a fixed cost to a variable cost. Finally, some health services organizations pay their employees on the basis of the amount of work performed, which would convert labor costs from fixed to variable.
Taken From : HEALTHCARE FINANCE
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