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Quantitative targets true goals are more qualitative

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Unformatted text preview: making Cost Classifications o Costs are classified in two major ways: by their relationship to volume, and by their relationship to the sub- unit being analyzed o Cost Behavior: the relationship between costs and the volume of services provided is called cost behavior or underlying cost structure If the underlying cost structure is known, managers can forecast costs at different levels of patient volume In the long run, all costs are variable; hence, the fixed versus variable classification can hold only in the short- run—say, for one year. o Costs can also be classified by their relationship to the unit of activity- Direct: costs unique and exclusive to a sub- unit Indirect, or overhead: costs associated with shared resources used by the entire organization Cost Allocation: the purpose is to assign all overhead costs to the departments that create the need for such costs, typically the patient service departments. o Cost pool: the overhead amount to be allocated A cost pool consists of the direct costs of one overhead department o Cost driver: the basis on which the cost pool will be allocated Cost drivers should create an allocation that is highly correlated with the actual amount of overhead services consumed Good cost drivers will have two important attributes: they are perceived as fair and they promote organizational cost reduction. o Traditional Allocation Process 1. Identify the Cost Pool- the cost pool is the dollar cost of the overhead activity to be allocated 2. Determine the Cost Driver- the cost driver is the basis on which the overhead costs will be allocated 3. Calculate the Allocation Rate- allocation rate = dollars in cost pool/total volume of cost driver 4. Determine the Allocation Amount Allocation Methods • o Direct method: the costs of each support department are allocated directly to, and only to, the patient services departments o Step- down method: some (but not all) of the intra- support department relationships are recognized. This method is more complex than the direct method but still manageable o Reciprocal method: recognizes all of the support department interrelationships, but it requires a system of simultaneous equations o...
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