Finance Test 6 Flashcards
what are the primary differences between financial and managerial accounting?
managerial focuses on data at all levels of the organization for purposes of planning, decision making, and control
Cost
no single definition
different costs for different purposes
relevant range
the range of volume expected over some planning period. The range over which fixed costs remain constant- if vol falls outside the relevant range, the fc, estimate may be invalid
fixed cost
a cost that is not related to the vol of services delivered
ex: facilities cost
variable cost
a cost that is directly related to the vol of services delivered and changes in total with changes in volume
ex: the cost of clinical supplies
Underlying Cost Structure
the relationship between an organization’s fixed costs, variable costs, and total costs. aka cost structure
variable cost rate
the variable cost of one unit of output (volume)
profit analysis
the technique applied to an organization’s cost and revenue structure that analyzes the effect of volume changes on costs and profits
aka CPV analysis
Profit and Loss Statement
summarizes the revs, exps, and profitability of either the entire organization or a subunit of it
contribution margin
diff between per unit rev and per unit cost
breakeven analysis
a type of analysis that estimates the amount of some variable that is needed to break even
accounting breakeven
the volume required to produce revenues sufficient to cover all accounting costs: zero profitability
economic breakeven
the volume required to produce revenues sufficient to cover all accounting costs and to provide a specified profit level
equation for volume breakeven
profit = Tot Rev - Tot VC - FC
Marginal cost
the cost of one additional unit of volume
marginal analysis
cost associated with each additional visit
more visits, they add to the existing base volume of visits
Marginal analysis is made more complicated by long term considerations
fix costs are often difficult to change quickly in the short run, making contribution margin is more important to consider
do marginal costs always consist only of variable costs?
no, they can also contain the incremental fixed cost per additional visit
under capitation, what is the diff between a CVP graph with the number of visits on the x and the number of members on the x axis?
number of visits: loss is above total revenues and profit is below
number of members: loss is below total costs and profit is above total costs
why is utilization so important in a capitated environment?
less utilization means lower total costs and lower total costs mean greater profit
Why is the number of members so important in a capitated environment?
a greater number of members increases profitability because additional members create additional revenues that presumably exceed their incremental (variable) costs
“to minimize financial risk, match the cost structure to the revenue structure”
the financial risk to a healthcare provider, at least in theory, is minimized by having a cost structure that matches its revenue structure
What cost structure would minimize risk if a provider had all fee for service reimbursement?
variable costs
What cost structure would minimize risk if a provider were entirely capitated?
fixes costs
What are real world constraints on creating matching cost structures?
- few providers are reimbursed solely on a fee for service of capitated basis
- providers do not have complete control over their cost structures
