HCM 416- Section 1 Flashcards
Define “Fixed Cost”
- These costs are more of less known with certainty, regardless of the level of volume within the relevant range
- Independent of volume; i.e. overhead costs (utilities, maintenance, depreciation)
What are “step fixed costs”?
Costs that are fixed to a certain volume and then they increase to a higher level of fixed cost to a certain level of volume
Discuss how fixed costs should be allocated to both support departments and revenue-producing departments.
Allocated based on a cost driver that represents the fixed cost the most
Define “Variable Costs”.
Costs that are directly related to/depend of volume
What are examples of variable costs? A. Drugs B. Maintenance Supervisor Salary C. Building depreciation D. Interest Expense
clinic supplies such as
A. Drugs
Define cost pool
the overhead amount to be allocated; consists of direct costs of one overhead department.
Define cost driver
Basis on which cost pool will be allocated.
Define Allocation Rate
When the cost pool is divided by the cost driver; numerical value used to make allocation.
allocation rate= dollars in cost pool/total volume of cost driver
Define Direct Costs
Those unique/exclusive to sub-unit; one that can be directly traced to producing specific goods or services.
Define Indirect Costs
Those costs associated with shared resources used by entire organization; costs that are not directly accountable to a particular function of product; indirect include taxes, admin, personnel and security costs.
What is the goal of cost allocation?
to assign all of the costs of an organization to activities that caused them to be incurred. To improve economic performance and reduce cost.
The dollar amount of overhead services to be allocated is: A. cost pool B. cost driver C. allocation rate D. none of the above
A. Cost Pool
If the cafeteria has 3,250,000 in overhead costs to be allocated on patient days and patient days are 18,259,000 then the allocation rate is?
3,250,000/18,259,000=
178
Difference between direct and indirect costs
Direct can be traced to producing a specific good or service where indirect is associated with shared resources and are not directly accountable to particular function or product
Which of the following is an example of direct healthcare cost?
A. Premiums paid to insurance company
B. Wage reductions in employee salary for insurance
C. Taxes paid to federal government
D. Co-payment paid to the doctors office
D. Co-payment paid to the doctors office
What is the goal of cost allocation and why?
To assign all the costs of an organization to activities that caused them to be incurred. To improve economic performance and reduce cost.
On what basis are cost drivers chosen?
The extent to which costs from a pool actually vary as the value of the cost driver changes.
What are the two characteristics make a good cost driver?
They would be perceived as being fair and they should promote org cost reduction.
What are the four steps in the cost allocation process?
Identify cost pool
Determine cost driver
Calculate allocation rate
Determine allocation amount
How does a Capitation plan work?
The provider is paid a fixed amount per covered life per period regardless of the amount of services provided; per member per month (PMPM) basis; not tied to utilization, but to number of covered lives; used primarily in managed care plans
Discuss the medicare Prospective Payment Plan and DRG’s
DRG’s were developed by Medicare as part of the prospective payment plan; assigned by a group of programs based on ICD-9 codes; purpose was developed to related types of patients treated to the resources they consumed
Define Cash Accounting
Recognizes an event when cash transaction takes place; simple/easy; mimics tax statements.
A projected cash flow statements uses
cash accounting
Define Accrual Accounting
Recognizes an even when an obligation is created; more complicated; provides better picture of true economic status of business; required by GAAP.
What is FASB?
Financial Accounting Standards Board- a private organization whose mission is to establish and improve standards of financial accounting and reporting for private business
In accrual accounting, as opposed to cash accounting:
Accounts receivable are recorded
What is GAAP?
Generally Accepted Accounting Principles- can be though of as a set of guidelines (objectives, conventions, and principles) that have evolved from pronouncements/rulings of implementing orgs for the preparation of financial statements; applies to only financial accounting statements
Why is Accrual Accounting considered superior to Cash Accounting?
It gives more information; gives organization true status of where they stand financially (cash accounting in its purest form does not present information on revenues owed to a business by payers or the business’s existing obligations)
Advantages of a partnership
ease of formation; subject to few regulations; no corporate income taxes
Advantages of a proprietorship?
ease of formation; subject to few regulations; no corporate income taxes
Advantages of a corporation?
unlimited life; easy to transfer ownership; limited liability; ease of raising capital
Which of the following is an example of a partnership/proprietorship?
A. Easy to start/form; subject to few regulations; no income tax
B. unlimited life; easy transfer of ownership
C. limited liability; ease of raising capital
D. none of the above
A. Easy to start/form; subject to few regulations; no income tax
Disadvantages of a partnership/ proprietorship?
limited life, difficult transfer of ownership, unlimited liability, difficult to raise capital
Disadvantages of a corporation?
cost of formation/reporting; double/triple taxation for investor-owned corporation
Why do high-income persons like to invest in tax-free bonds?
because they pay less taxes in their income ie high income is $100,000; if no investment, whole $100,000 will be taxed; if they do invest $20,000 in tax-free bond, they only pay taxes on $80,000 (there is no tax to be paid on the interest it earns)
What are bonds?
A long-term contract under which a borrower/issuer agrees to make payments of interest and principal, on specific dates, to the holder of the bond. A bond issue is generally registered with the SEC, advertised, offered to the public through investment bankers, and actually sold to many different investors
The yield to maturity on a bond is the:
expected rate of return
The coupon rate on a bond is the interest rate you earn on a bond regardless of the price you paid: T/F
True
What is the difference between equity financing and debt financing?
Equity financing is obtained from shareholders through the sale of common stock and debt financing is provided by creditors
Define equity financing
obtained from shareholders through the sale of common stock
Define debt financing
provided by creditors
Advantages of debt financing
it is finite (limited) and you will pay down the debt over time to a zero sum balance without any further obligation to the lender; company only owes what was borrowed under terms of contract (principle plus interest) not considering profits
Disadvantages of debt financing
traditional lenders will take a hard look at your business including how long it has been in existence, income from operation, expenses and will require hard assets for collateral for the loan; if company appears to not be able to make payments on time as stated in contract, creditors can come in and force company into bankruptcy or take the company’s collateral
Advantages of equity financing
venture capital—you will be receiving money in exchange for equity in your business in the form of stock or some other form of equity like percentage of income or gross/net sales; if company makes more money, then stockholders receive just as much money plus profits
Disadvantages of equity financing
if company loses money/goes out of business, shareholders lose money as well; seen as gambling on business
Which financial statement is a snapshot of the organization’s financial picture at one point in time?
Balance Sheet
Which financial statement presents the activity of the business for the previous time period?
Income Statement
How are the 3 statements intertwined?
The all build up showing the same thing. The balance sheet shows a specific date, the cash flows show how cash is moved in the org and the income statement shows all of the above for the entire year
Define Opportunity Cost
Opportunity cost if the cost (sacrifice) incurred by choosing one option over an alternative on that may be equally desired
For example, if the money is used for one investment, it is no longer available for other uses, so an opportunity cost arrises
Why does a investment have an opportunity cost rate even when the funds employed have no explicit cost?
It has an opportunity cost due to the cost of the funds lost by not using other investment opportunities
How are opportunity costs rates established?
By looking at rates that could be earned, or more precisely, rates that are expected to be earned, on securities such as stocks and bonds
Does the opportunity cost rate depend on the source of the investment funds?
NO
Discuss the differences between debt and equity financing.
Equity financing is obtained from shareholders through the sale of common stock. Debt financing, on the other hand is provided by creditors.
What are the advantages and disadvantages of debt financing
The benefit of debt financing is that it is finite and you will pay down the debt over time to a zero sum balance without any further obligation to the lender. The down stroke to debt financing is that traditional lenders will take a hard look at your business including how long it has been in existence, income from operation, expenses and will require hard assets for collateral for the loan
What are the advantages and disadvantages of equity financing
The benefit of equity financing or venture capital is that you will be receiving money in exchange for equity in your business in the form of stock or some other form of equity like percentage of income or gross/net sales.
What are the differences between tax-free municipal bonds and taxable corporate bonds?
Municipal bonds are long term debt obligations issued by states and political subdivisions; WHEN PAID DIVIDEND, DO NOT HAVE TO PAY TAXES; Corporate bonds are issued by investor-owned firms; MUST PAY TAXES ON DIVIDENDS RECEIVED (corporate bonds have a shorter life. municipal bonds are issued by the state and are not taxable)
Mrs. Smith purchases taxable bonds that earn 8% interests. If Mrs. Smith’s tax rate is 28%, what is the interest’s rate?
AT=BT (1-T)
AT=8% (1-.28)
AT=8% (0.72)
AT=5.76%
Mrs. Smith purchases taxable bonds that earn 9% interests. If Mrs. Smith’s tax rate is 28%, what is the interest’s rate?
AT=BT (1-T)
AT= 9% (1-.28)
AT=9% (0.72)
AT=6.48%
What is a “callable” bond?
Municipal bonds are long term debt obligations issued by states and political subdivisions; when paid dividend, do not have to pay taxes; corporate bonds are issued by investor-owned firms, must pay taxes on dividends received
Would you rather be a preferred stockholder or a common stockholder?
Preferred because they get their dividends first and common stockholders get theirs last if there is anything left over. The bad side to being a preferred stockholder is that you do not have the right to vote, while common stockholders do
