Cost Analysis Principles

Question 1

Direct cost

Answer 1

Direct costs are costs directly incurred in providing
healthcare services. Direct costs can be variable, such
as nursing salaries and medical supplies, or fixed, such
as supervisor salaries and equipment costs.

Question 2

Indirect cost

Answer 2

Indirect costs are costs necessary to operate the
business but not directly incurred in service delivery.
Examples are administration, finance, billing,
information technology, facility maintenance and
security. Indirect costs can be variable or fixed. (Also
referred to as overhead.)

Question 3

Fixed cost

Answer 3

Fixed costs are constant, regardless of the volume of

services provided.

Question 4

Variable cost

Answer 4

Variable costs vary with the volume of services

provided.

Question 5

Cost allocation

Answer 5

Cost allocation is a process by which indirect
(overhead) costs are allocated to revenue-producing
services in a top-down fashion either directly or via a
step-down method.

Question 6

Cost pool

Answer 6

The amount of indirect or overhead cost to be allocated
to revenue-producing departments is called a cost
pool.

Question 7

Cost driver

Answer 7

Cost driver is an activity based costing term. A cost
driver is the method by which a cost pool is assigned to
revenue producing functions. Time is a key cost driver
in healthcare.

Question 8

Activity based

costing

Answer 8

Activity based costing (ABC) is a bottom-up costing
technique that assigns costs to individual services
based on actual cost consumption, frequently on the
basis of time.