Finance Test 7 Flashcards
Direct Cost
a cost that is tied exclusively to a subunit of an organization, such as the salaries of a department’s employees
Indirect (overhead) cost
a cost that is tied to shared resources rather than to an individual subunit of an organization; facilities cost
Cost Allocation
the process by which overhead costs are assigned to individual departments within an organization
Full cost
all cost, direct and indirect cost
the goal of cost allocation
to assign all of the costs of an organization to the activities that cause them to be incurred
why is cost allocation important?
can make better decisions and optimize financial performance
cost pool
a group of overhead costs to be allocated; facilities cost
cost driver
the basis on which a cost pool is allocated; square footage for facilities costs
allocation rate
the numerical value used to allocate overhead costs
Under what conditions should a single overhead department be divided into multiple cost pools?
when a single department offer different services and they use different amounts
on what theoretical basis are cost drivers chosen?
the extent to which costs from a pool actually very as the value of the driver changes.
What 2 characteristics make an effective cost driver?
fairness and cost control
What are the four steps in the cost allocation process?
- establish the cost pool
- identify the cost driver
- allocation rate is established
- make the allocation to each department
three primary methods of cost allocation
reciprocal method
step down method
direct method
direct method
all overhead costs are allocated directly from the overhead departments to the patient services departments
step down method
recognizes some of the overhead services provided by one support department to another
reciprocal method
recognizes all of the overhead services provided by one support department to another
profit center
a business unit that generates revenues as well as costs
cost center
a business unit that does not generate revenues, only costs can be measured.
Cost to charge ratio
a ratio used to estimate the overhead costs of individual services; defined as the ratio of indirect costs to charges
relative value unit method
a method for estimating the overhead costs of individual services based on the intensity of the services provided, as measured by RVUs
traditional costing
a top down approach to costing that first identifies costs of the department level and then assigns those costs to individual services
activity based costing
a bottom up approach to costing that identifies the activities required to provide a particular service, estimates the costs of those activities, and then aggregates those costs
time driven activity based costing
an approach to costing that focuses on the entire cost of a patient’s cycle of care rather than the cost of the individual services
price taker
a business that has no power to influence the prices set by the marketplace
price setter
a business that has the power to set the market prices for its goods or services
full cost pricing
the process of setting prices to cover all costs plus a profit component
marginal cost pricing
the process of setting prices to cover only marginal costs
cross subsidization (price shifting)
a pricing approach in which some payers are charged more than full costs to make up for other payers that are paying less than full costs
target costing
for price takers, the process of reducing costs to the point at which a profit is earned on the market determined price
scenario analysis
a project risk analysis technique that examines alternative outcomes, generally three, as opposed to only the most likely outcome
what is target costing’s greatest value?
lies in the fact that it forces managers to recognize that the market, rather than the provider, is setting prices
