Managerial Accounting for Healthcare

Question 1

_____________ accounting is purposed to provide accounting information, generally historical in nature, to external users, including owners, lenders, suppliers, the government and insurers.

Answer 1

Financial

Question 2

__________ 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.

Answer 2

Managerial

Question 3

What are the four major categories of cost characteristics?

Answer 3

Traceability

Behavior

Management responsibility

Future / historical

Question 4

What is cost traceability?

What are the two subcategories?

Answer 4

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)

Question 5

What type of cost includes both direct and indirect?

What are average costs?

Answer 5

Full costs;

the full cost divided by the number of products and/or services

Question 6

What values need to be known to calculate average costs?

Answer 6

Total (full) cost;

relative value units

Full cost / relative value units = average cost

Question 7

Cost structure is determined by the relative amounts of what three factors of cost behavior?

Answer 7

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.)

Question 8

What are marginal costs?

Answer 8

The variable cost of producing one unit (of whatever product)

Question 9

How do variable costs (e.g. amount of gloves, medication, MRI usage) change with output changes?

Answer 9

Linearly

Question 10

How do fixed costs (e.g. rent) change with output changes?

Answer 10

They do not

Question 11

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?

Answer 11

In a stepwise manner (non-proportionally)

Question 12

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

Answer 12

Rent - fixed

MRI machine - variable

Physician salaries - mixed

Latex gloves - variable

Question 13

Answer 13

B.

Question 14

What does it mean for a cost to have controllability?

Answer 14

The cost can be influenced by managerial decisions (e.g. labor costs; not utility costs)

Question 15

What are the four types of cost to be considered when discussing historical and future costs?

Answer 15

1. Avoidable
2. Sunk
3. Incremental
4. Opportunity

Question 16

What is an avoidable cost?

Answer 16

Activity-dependent cost (can be eliminated if an activity is discontinued)

Question 17

What is a sunk cost?

Answer 17

Costs already lost / unregainable (unaffected by the decision under consideration)

Question 18

What is an incremental cost?

Answer 18

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)

Question 19

What are opportunity costs?

Answer 19

Values lost by using a resource in a particular way instead of the next best way

Question 20

What is cost allocation?

I.e. describe the role of cost centers and revenue-generating centers in relation to one another.

Answer 20

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.)

Question 21

What is an allocation base?

Answer 21

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

Question 22

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?

Answer 22

300

($10,000 + $5,000) / $50

Question 23

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

Answer 23

$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.

Question 24

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?

Answer 24

$200

$20,000 / 100

Question 25

What is a profitability index?

Answer 25

The weighted contribution of a product/service per unit of output

Question 26

What are the two basic steps of cost allocation?

Answer 26

**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)

Question 27

What is direct approportionment cost allocation?

Answer 27

A **onetime** **allocation** of all costs from departments that do not generate revenue to cost centers that do generate revenue.

Question 28

What is step-down approportionment cost allocation?

Answer 28

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**

Question 29

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)?**

Answer 29

**12,500** *$10,000,000 / ($1,200 - $400)*

Question 30

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. ## Footnote **What is the breakeven point for the clinic?**

Answer 30

**4,000** Revenue - cost = 0 (1,000 members \* $100/member/month \* 12 months) - ($600,000 + ($150 \* X)) = 0

Question 31

What is the very simple equation for the breakeven point?

Answer 31

Revenue - cost = 0

Question 32

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?

Answer 32

**140** $750,000 + (10,000 \* $50) + $150,000 / 10,000

Question 33

What is the equation for allocation rate?

Answer 33

$ being distributed (in a cost allocation) / total # of cost driver units in the revenue-generating departments

Question 34

You want to earn a 10% profit on a $50.00 per member premium. How do you calculate the new premium?

Answer 34

$**55.56** *50/0.9*

Question 35

What is the equation for profitability index?

Answer 35

**PI** = CH(IP - V) + FP(EP - V)

Question 36

What is the equation for profit?

Answer 36

Revenue - expenses

Question 37

What is the equation for breakeven quantity?

Answer 37

Total fixed costs / (charge - variable cost)

Question 38

What is the equation for contribution margin?

Answer 38

Charge - variable cost per unit

Question 39

What is the equation for contribution margin percent?

Answer 39

(Charge - variable cost per unit) / charge

Question 40

What is the equation for breakeven point $?

Answer 40

Total fixed cost / contribution margin percent

Question 41

**True/False**. The breakeven analysis is also known as cost-volume-profit analysis.

Answer 41

True.

Question 42

1. What is the breakeven volume? 2. How about for a $6,000 profit? **Variable cost per case = $1,000** **Fixed cost per period = $100,000** **Price per case = $2,400**

Answer 42

1. ) **71.4 cases** * 100,000/(2,400-1,000)*; 2. ) **75.7 cases** * (100,000+6,000)/(2,400-1,000)*

Question 43

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?

Answer 43

**60** *($2,000+$1,000)/50*

Question 44

What is prospective payment?

Answer 44

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.)*

Question 45

What is the difference between a cost payer and a charge payer?

Answer 45

**Cost payers:** paying the average cost of services provided. **Charge payers:** paying on the basis of internally set prices.

Question 46

What do you need to calculate the changes in a company's profit if you know the change in units produced?

Answer 46

The profitability index (per unit)

Question 47

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

Answer 47

**$1,000** ($20 per unit - $10 per unit)100 units

Question 48

What is differential costing?

Answer 48

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.