Part II: Record Financial Operations

Transcription

1 Part II: Record Financial Operations CHAPTER 6: COST CLASSIFICATIONS

2 Distinction Between Direct And Indirect Costs Direct Costs are specifically associated with a particular unit or department or patient. Direct costs directly attributable to the cost object (any until for which a separate cost measurement is desired).

3 Distinction Between Direct And Indirect Costs Indirect Costs, on the other hand, cannot be specifically associated with a particular unit or department or patient. Indirect costs can t be directly attributed to the cost object (any unit for which a separate cost measurement is desired).

4 Direct & Indirect Cost: Example Example of Direct Costs Salaries and fringe benefits $500,000 Salaries other professionals 40,000 Medical director 40,000 Medical supplies 550,000 Pharmacy 1,130,000 Equipment depreciation 80,000 Utilities 80,000 Housekeeping & laundry 20,000 Property taxes 40,000 Other supplies & costs 20,000 Total direct costs $2,500,000 Example of Indirect Costs Facility costs $300,000 Administrative costs 300,000 Total indirect costs $600,000

5 Direct Costs Indirect Costs Managed care marketing expense Real estate taxes Liability insurance Clinic telephone expense Utilities for facility Emergency room medical supplies Health Care Finance by Judith J. Baker and R.W. Baker. Copyright 2006 by Jones and Bartlett Publishers, Inc. Chapter 6 Slide 5

6 Identifying Direct & Indirect Cost: Practice Direct Costs Indirect Costs Managed care marketing expense Real estate taxes Liability insurance Clinic telephone expense Utilities for facility Emergency room medical supplies

7 Health Care Finance by Judith J. Baker and R.W. Baker. Copyright 2006 by Jones and Bartlett Publishers, Inc. Chapter 6 Slide 7

8 Worksheet 1 Indirect Cost Centers Identifying Direct & Indirect Total Indirect Costs Allocation Basis Cost: Assignment CC #557 Diagnostic Radiology CC #558 Ultrasound CC #559 Nuclear Medicine CC #560 CT Scan CC #561 Radiation Therapy Transporters $550,000 A $132,000 $143,000 $77,000 $121,000 $77,000 $550,000 Receptionists 360,000 B 66,000 42,000 78,000 96,000 78, ,000 File Room Clerks 117,000 C 90,000 4,500 12,375 5,625 4, ,000 Managers 240,000 B 44,000 28,000 52,000 64,000 52, ,000 Totals $1,267,000 $332,000 $217,500 $219,375 $286,625 $211,000 $1,267,000 Worksheet 2 Indirect Cost Centers CC #557 Diagnostic Radiology CC #558 Ultrasound CC #559 Nuclear Medicine CC #560 CT Scan CC #561 Radiation Therapy Direct Costs $1,100,000 $700,000 $1,300,000 $1,600,000 $1,300,000 $6,000,000 Indirect Costs 332, , , , ,500 1,267,000 Totals $1,432,000 $917,500 $1,519,375 $1,886,625 $1,511,000 $7,267,000 Total Total

9 Distinction Between Direct And Indirect Costs Direct Costs are for the sole benefit of a particular operating unit (department) and can be traced while Indirect Costs are for the benefit of the overall operation and not for any one unit (department). They have to be allocated.

10 Why the Difference Is Important to Management The Manager is often responsible for the traceable expenses (Direct Expenses) but Is not responsible for the allocated expenses (the Indirect Expenses, or overhead). Study the examples in the chapter closely.

11 Responsibility Centers In a Responsibility Center the Manager is responsible for both the revenue/volume (inflow) side and the expense (outflow) side of a department, division, unit, or program.

12 Responsibility Centers Responsibility Center information is especially important because the Manager is responsible for the operation. Study the Westside Center example in the chapter carefully.

13 Distinction Between Product and Period Costs Traditionally, Product Costs represent a product that has been manufactured and placed into inventory while waiting to be sold. Then, when the product is sold, it is removed from inventory, matched with revenue, and recognized as a cost.

14 Distinction Between Product and Period Costs A Period Cost is not connected to the manufacturing process. Instead it is matched with revenue on the basis of what period the cost is incurred; thus period costs.* * The term comes from the span of time in which matching occurs, known as a time period.

15 Distinction Between Product and Period Costs Medical Supply and Pharmacy Departments have inventories on hand. They use the Product Cost method, removing the item from inventory and then matching it with cost.

16 Distinction Between Product and Period Costs Except for departments that carry inventories, however, health care is a service business. One way to think of product costs in this instance is as necessary to the department, division, unit, etc. to deliver the service, while period costs are necessary to support the existence of the organization itself.