Finance Test 7

Question 1

Direct Cost

Answer 1

a cost that is tied exclusively to a subunit of an organization, such as the salaries of a department’s employees

Question 2

Indirect (overhead) cost

Answer 2

a cost that is tied to shared resources rather than to an individual subunit of an organization; facilities cost

Question 3

Cost Allocation

Answer 3

the process by which overhead costs are assigned to individual departments within an organization

Question 4

Full cost

Answer 4

all cost, direct and indirect cost

Question 5

the goal of cost allocation

Answer 5

to assign all of the costs of an organization to the activities that cause them to be incurred

Question 6

why is cost allocation important?

Answer 6

can make better decisions and optimize financial performance

Question 7

cost pool

Answer 7

a group of overhead costs to be allocated; facilities cost

Question 8

cost driver

Answer 8

the basis on which a cost pool is allocated; square footage for facilities costs

Question 9

allocation rate

Answer 9

the numerical value used to allocate overhead costs

Question 10

Under what conditions should a single overhead department be divided into multiple cost pools?

Answer 10

when a single department offer different services and they use different amounts

Question 11

on what theoretical basis are cost drivers chosen?

Answer 11

the extent to which costs from a pool actually very as the value of the driver changes.

Question 12

What 2 characteristics make an effective cost driver?

Answer 12

fairness and cost control

Question 13

What are the four steps in the cost allocation process?

Answer 13

1. establish the cost pool
2. identify the cost driver
3. allocation rate is established
4. make the allocation to each department

Question 14

three primary methods of cost allocation

Answer 14

reciprocal method
step down method
direct method

Question 15

direct method

Answer 15

all overhead costs are allocated directly from the overhead departments to the patient services departments

Question 16

step down method

Answer 16

recognizes some of the overhead services provided by one support department to another

Question 17

reciprocal method

Answer 17

recognizes all of the overhead services provided by one support department to another

Question 18

profit center

Answer 18

a business unit that generates revenues as well as costs

Question 19

cost center

Answer 19

a business unit that does not generate revenues, only costs can be measured.

Question 20

Cost to charge ratio

Answer 20

a ratio used to estimate the overhead costs of individual services; defined as the ratio of indirect costs to charges

Question 21

relative value unit method

Answer 21

a method for estimating the overhead costs of individual services based on the intensity of the services provided, as measured by RVUs

Question 22

traditional costing

Answer 22

a top down approach to costing that first identifies costs of the department level and then assigns those costs to individual services

Question 23

activity based costing

Answer 23

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

Question 24

time driven activity based costing

Answer 24

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

Question 25

price taker

Answer 25

a business that has no power to influence the prices set by the marketplace

Question 26

price setter

Answer 26

a business that has the power to set the market prices for its goods or services

Question 27

full cost pricing

Answer 27

the process of setting prices to cover all costs plus a profit component

Question 28

marginal cost pricing

Answer 28

the process of setting prices to cover only marginal costs

Question 29

cross subsidization (price shifting)

Answer 29

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

Question 30

target costing

Answer 30

for price takers, the process of reducing costs to the point at which a profit is earned on the market determined price

Question 31

scenario analysis

Answer 31

a project risk analysis technique that examines alternative outcomes, generally three, as opposed to only the most likely outcome

Question 32

what is target costing’s greatest value?

Answer 32

lies in the fact that it forces managers to recognize that the market, rather than the provider, is setting prices