Cost Drivers (2)
Posted on August 13, 2009 - Filed Under Finance
Good cost drivers exhibit two characteristics. First, and perhaps the less important of the two, is fairness—that is, do the cost drivers chosen result in an allocation that is fair to the patient services departments? The second, and perhaps more important, characteristic is cost control—that is, do the cost drivers chosen create incentives for departments to utilize less overhead services? For example, there is little that patient services department managers can do to Step One:
Determine the Cost Pool
The departmental costs to be allocated are for the Housekeeping department, which has total budgeted costs for 2005 of $100,000. Step Two: Determine the Cost Driver The best cost driver was judged to be the number of hours of housekeeping services provided. An expected total of 10,000 hours of such services will be provided in 2005 to those departments that will receive the allocation.
Step Three: Calculate the Allocation Rate $100,000 / 10,000 hours = $10per hour of housekeeping services provided.
Step Four: Determine the Allocation Amount
Physical Therapy utilizes 3,000 hours of housekeeping services, so its allocation of Housekeeping department overhead is $10 × 3,000 = $30,000. influence overhead cost allocations if the cost driver is patient days. In fact, the action needed to reduce the overhead allocation, reduction in patient days,
would likely lead to negative financial consequences for the organization. A good cost driver will encourage patient services department managers to take overhead cost reduction actions that do not have negative implications for the organization. The remainder of this chapter emphasizes the importance of good cost drivers, including several illustrations that distinguish good drivers from poor ones.
Taken From : HEALTHCARE FINANCE
Comments
2 Responses to “Cost Drivers (2)”
Leave a Reply
[…] housekeeping costs for 2005.1 First, the cost pool must be established. In this case, the clinic is allocating housekeeping costs, so the cost pool is the projected total costs of the Housekeeping department, […]
[…] use of the diet received bar. Assimilation of the usual bare nutrition for bodybuilding or bulking up is very important, but […]