The Allocation Process
Posted on August 16, 2009 - Filed Under Finance | 2 Comments
The steps involved in allocating overhead costs are summarized in Table 6.1, which illustrates how Prairie View Clinic allocated its 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, $100,000.
Read More..>>Cost Drivers (2)
Posted on August 13, 2009 - Filed Under Finance | 2 Comments
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 […]
Read More..>>Cost Drivers
Posted on August 10, 2009 - Filed Under Finance | 4 Comments
Perhaps the most important step in the cost allocation process is the identification of proper cost drivers. Traditionally, overhead costs were aggregated across all support departments and then divided by a rough measure of organizational output, resulting in an allocation rate of some dollar amount of generic overhead per unit of output. For example, the […]
Read More..>>Cost Allocation Basics
Posted on August 7, 2009 - Filed Under Finance | 2 Comments
To assign costs from one activity to another, two important elements must be identified: a cost pool and a cost driver. A cost pool is a grouping of costs that must be allocated, while a cost driver is the criterion upon which the allocation is made. To illustrate, a hospital may allocate housekeeping costs to […]
Read More..>>Introduction to Cost Allocation
Posted on August 4, 2009 - Filed Under Finance | 2 Comments
A critical part of cost measurement at the sub-unit level is the assignment, or allocation, of indirect costs. Cost allocation is essentially a pricing process within the organization whereby managers allocate the costs of one department to other departments. Because this pricing process does not occur in a market setting, no objective standard exists that […]
Read More..>>Direct Versus Indirect (Overhead) Costs
Posted on August 1, 2009 - Filed Under Finance | 2 Comments
Some costs—about 50 percent of a health services organization’s cost structure are unique to the reporting sub-unit and hence usually can be identified with relative certainty. To illustrate, consider a hospital’s clinical laboratory. Certain costs are unique to the laboratory: for example, the salaries and benefits for the technicians who work there and the costs […]
Read More..>>Cost Allocation
Posted on July 29, 2009 - Filed Under Finance | 1 Comment
Learning Objectives
After studying this chapter, readers will be able to:
• Explain why proper cost allocation is important to health services organizations.
• Define a cost driver and explain the characteristics of a good driver as opposed to a poor one.
• Describe the three primary methods used to allocate overhead costs among revenue producing departments.
• Apply cost-allocation […]
Evaluating the Alternative Strategies
Posted on July 26, 2009 - Filed Under Finance | 1 Comment
What should Atlanta’s managers do? If Peachtree’s proposal is accepted, the clinic is expected to lose $580,962 rather than make a profit of $419,038 when no discount was demanded. The difference is a swing of $1 million in profit in the wrong direction, hardly an enticing prospect. What happened to
the “missing” $1 million? It is […]
The Impact of Accepting the Proposal
Posted on July 23, 2009 - Filed Under Finance | Leave a Comment
An alternative strategy for the clinic’s managers would be to accept Peachtree’s proposal. The resulting projected P&L statement is contained in Table 5.8. The average per visit revenue of serving these two different payer groups is (2/3 × $100) + (1/3 × $60) = $86.67. Total revenues based on this average
revenue per visit would be […]
The Impact of Rejecting the Proposal
Posted on July 20, 2009 - Filed Under Finance | Leave a Comment
If Atlanta’s managers reject the proposal, the clinic would lose market share— an estimated 25,000 visits. The projected P&L statement that would result, which is based on 50,000 undiscounted visits, is shown in Table 5.7. At the lower volume, the clinic’s total revenues, total variable costs, and total contribution margin decrease proportionately (i.e., by one […]
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