Managerial Accounting for Healthcare Flashcards
_____________ accounting is purposed to provide accounting information, generally historical in nature, to external users, including owners, lenders, suppliers, the government and insurers.
Financial
__________ accounting is purposed to provide accounting information, generally current or prospective in nature, to internal users, including managers. Such information supports the planning and control management functions.
Managerial
What are the four major categories of cost characteristics?
Traceability
Behavior
Management responsibility
Future / historical
What is cost traceability?
What are the two subcategories?
The ability to determine where your funds have gone;
direct - traceable to a specfic object/ event (e.g. lab tests, salaries, supplies, rent, etc.)
indirect - untraceable without arbitrary assignment (e.g. depreciation, employee benefits, allocated resources from another department)
What type of cost includes both direct and indirect?
What are average costs?
Full costs;
the full cost divided by the number of products and/or services
What values need to be known to calculate average costs?
Total (full) cost;
relative value units
Full cost / relative value units = average cost
Cost structure is determined by the relative amounts of what three factors of cost behavior?
1. Variable costs (e.g. gloves, MRI use, specific medications)
2. Fixed costs (e.g. rent)
3. Mixed costs (semi-fixed, semi-variable, curvilinear) (e.g. salary, number of patients per provider, etc.)
What are marginal costs?
The variable cost of producing one unit (of whatever product)
How do variable costs (e.g. amount of gloves, medication, MRI usage) change with output changes?
Linearly
How do fixed costs (e.g. rent) change with output changes?
They do not
How do mixed/semi-variable/semi-fixed costs (e.g. seeing X more patients means you need to hire another provider) change with output changes?
In a stepwise manner (non-proportionally)
Identify each of the following as either a fixed, a variable, or a mixed cost.
o Rent
o MRI Machine
o Physician Salaries
o Latex Gloves
Rent - fixed
MRI machine - variable
Physician salaries - mixed
Latex gloves - variable
B.
What does it mean for a cost to have controllability?
The cost can be influenced by managerial decisions (e.g. labor costs; not utility costs)
What are the four types of cost to be considered when discussing historical and future costs?
- Avoidable
- Sunk
- Incremental
- Opportunity
What is an avoidable cost?
Activity-dependent cost (can be eliminated if an activity is discontinued)
What is a sunk cost?
Costs already lost / unregainable (unaffected by the decision under consideration)
What is an incremental cost?
Management action implement change (e.g. a new provider on the payroll) resulting in increased costs that should bring in more revenue (i.e. an investment)
What are opportunity costs?
Values lost by using a resource in a particular way instead of the next best way
What is cost allocation?
I.e. describe the role of cost centers and revenue-generating centers in relation to one another.
The process of assigning pooled indirect costs to specific cost objects using an allocation base that represents a major function of a business.
(I.e. the cost centers’ lost funds are ‘absorbed’ by the revenue-generating centers. The remaining funds are the profit.)
What is an allocation base?
A cost driver;
a volume metric that is used to allocate costs, based on its cause-and-effect relationship to why the costs occurred.
E.g. the cost driver for laundry is the pounds of laundry present; the cost driver for HR is the number of employees you have at the company
A business has a contribution margin per unit of $50, has fixed costs of $5,000, and wants to achieve a total profit of $10,000.
How many units must the business sell to earn that total profit of $10,000?
300
($10,000 + $5,000) / $50
A hospital has visits from a charge-based fee-for-service payer. The payer wants to move its 50 enrollees to a capitation system. What per member per month rate must be set on these patients to maintain the current profit level?
FFS revenue per visit: $20
Variable cost per visit: $5
Fixed annual cost: $300
FFS annual visits: 100
$3.33 per member per month
($20/visit * 100 visits) / (50 members * 12 months)
NOTE: COSTS DO NOT MATTER HERE AS THEY DID NOT CHANGE.
A hospital has a volume reduction of 100 procedures and profits drop from $70,000 to $50,000. What is the profitability index of the procedure?
$200
$20,000 / 100
What is a profitability index?
The weighted contribution of a product/service per unit of output
What are the two basic steps of cost allocation?
1. Decide which departments generate net revenue and which generate net cost
2. Select an allocation base (e.g. lbs. of laundry or hours of housekeeping)
What is direct approportionment cost allocation?
A onetime allocation of all costs from departments that do not generate revenue to cost centers that do generate revenue.
What is step-down approportionment cost allocation?
An allocation of all costs from cost centers that do not generate revenue to other non-revenue generating departments and then a onetime allocation to departments that generate revenue
1. Net cost center to net cost center
2. Net cost center to revenue generator
Consider the following data:
Fixed costs = $10M
Variable cost per inpatient day = $400
Revenue per inpatient day = $1,200
What is the breakeven volume (in patient days)?
12,500
$10,000,000 / ($1,200 - $400)
An outpatient clinic is considering a capitated agreement with an insurance company whereby the clinic would provide outpatient coverage to a 1,000 member plan at $100 per member per month. Variable costs are projected to be $150 per clinic visit, and fixed costs allocated to the agreement are $600,000 per year.
What is the breakeven point for the clinic?
4,000
Revenue - cost = 0
(1,000 members * $100/member/month * 12 months) - ($600,000 + ($150 * X)) = 0
What is the very simple equation for the breakeven point?
Revenue - cost = 0
A practice has annual fixed costs of $750,000 and a variable cost per visit of $50.
If volume in the first year is expected to be 10,000 visits, what price per visit must be set if the practice wants to make an annual profit of $150,000?
140
$750,000 + (10,000 * $50) + $150,000
/
10,000
What is the equation for allocation rate?
$ being distributed (in a cost allocation)
/
total # of cost driver units in the revenue-generating departments
You want to earn a 10% profit on a $50.00 per member premium. How do you calculate the new premium?
$55.56
50/0.9
What is the equation for profitability index?
PI = CH(IP - V) + FP(EP - V)
What is the equation for profit?
Revenue - expenses
What is the equation for breakeven quantity?
Total fixed costs / (charge - variable cost)
What is the equation for contribution margin?
Charge - variable cost per unit
What is the equation for contribution margin percent?
(Charge - variable cost per unit) / charge
What is the equation for breakeven point $?
Total fixed cost / contribution margin percent
True/False.
The breakeven analysis is also known as cost-volume-profit analysis.
True.
- What is the breakeven volume?
- How about for a $6,000 profit?
Variable cost per case = $1,000
Fixed cost per period = $100,000
Price per case = $2,400
- ) 71.4 cases
* 100,000/(2,400-1,000)*; - ) 75.7 cases
* (100,000+6,000)/(2,400-1,000)*
A business has a contribution margin per unit of $50, has fixed costs of $2,000, and wants to achieve a total profit of $1,000.
How many units must the business sell to earn that profit of $1,000?
60
($2,000+$1,000)/50
What is prospective payment?
A healthcare organization accepts a fixed predetermined amount to treat a patient, regardless of the true cost of that treatment (ex. DRGs)
(Note: this is different from capitation, where the healthcare organization is paid per member regardless of patient health or disease.)
What is the difference between a cost payer and a charge payer?
Cost payers: paying the average cost of services provided.
Charge payers: paying on the basis of internally set prices.
What do you need to calculate the changes in a company’s profit if you know the change in units produced?
The profitability index (per unit)
Calculate the total contribution margin (not per unit) in the problem given the following information:
Revenue is $20 per unit
Variable costs are $10 per unit
Fixed costs are $1,000
The company sold 100 units
$1,000
($20 per unit - $10 per unit)100 units
What is differential costing?
A method of assembling costs and/or revenue for alternative decisions.
In this method, sunk costs are not relevant; incremental or differential costs are relevant.
