Direct costs were $ 100,000 in 2007
Three revenue-producing patient services department using direct method
Two cost drivers available: patient services revenue and hours of housekeeping services
Patient service generated 5MILLIONS
Hours used in the support are 5,000 HOURS
Value of the cost pool
A cost pool is a sum f all associated costs incurred for the provision of services of for production of goods. In this case, housekeeping Service department is the department that costs are being evaluated; the total value of cost pool is $100,000; this figure only represent the potion of directs costs in the department.
What is the allocation rated if
- Patient services revenue is used as the cost driver.
Patient services departments generated $5 million then if $ 100,000 is to be attributed to the income generated then:
= $100,000/5,000, 000
= $0.02 per every $ 1 Dollar made.
In every $50 made, then housekeeping, service incurred is $1
- Hours of housekeeping services is used as the cost driver
Hours used in the support are 5,000.
When hours are used as the rate of accounting for the housekeeping services expense then the cost used per hour rating will be:
= $20 per hour.
Cost-volume-profit (CVP) analysis
CVP is a decision making tool used to establish the relationship between output, sales revenue, profit margin and expenses in a production. Using a number of assumptions, which will be discussed later, the method analysis the costs performance in different situation and levels of production. When using the method, managers are able to understand what really happens in an organization if there is a change in activity level or output of production fluctuates. It is used t calculate breakeven pint units and sales revenue. The information given is vital to management since the out influences costs, sales revenue and profits of a company. The calculations can be done mathematically or graphically.
The following are some of the assumptions of the method:
- That there is single product sales mix
- Variable do not change; they are constant
- When using graphical analysis that the function of total cost and total revenue is linear
- Complexity-related fixed costs remains fixed
- It has a short term analysis only (Penner, 2003)
Reasons why CVP is useful to health services managers
The following are the advantages that managers in the health services prefer the method:
The method is straight forward and focuses on the short term where costs and revenue can be predicted more precisely
- It is a strong management decision tool where it looks into issues of costs, revenue and profit relationship- the three variables are the core of business
- It is a flexible method of analysis where mangers can use mathematical interpolations, graphical analysis and can be computerized
- The results of the method results to sound decisions
Compare and contrast the following three methods of developing capitation rates
Fee-for-service approach is a pricing model used by doctors and medical practitioners, as well as other professions that offer services, to charge a patient for service given. From the customer point of view, it is the cost of treatment while the doctor or medical practitioner can have further division as follows:
- Consultation cost
- Cost of tests done
- Risks analysis costs
- Fixed cost
- Profit margin among other costs depending with the facility at hand (Gapenski, 2008).
Cost approach method
Under this method, the amount of money charged per patient is guided by a preset way of charging patients. For example, a set amount of consultation fee set despite the amount of time that a patient has used in a facility.
The amount charged to the customer includes the profit element and it is always a figure higher than the cost incurred in maintaining the facility.
This billing procedure mostly takes effect when there are third parties and services given benefits a large population that having to determine every patient’s costs thus setting the price is not possible. It is mostly used by governments and in insurance medical schemes.
What are the advantages and disadvantages of conventional budgeting versus zero-based budgeting?
Under conventional form of budgeting, departments are responsible of making their own budget, the budget is made with previous budget performance in terms of expenses and revenue is concerned. Departments only justify any increase or decrease in current budget compared with previous budget.
Zero base budgeting is a modern form of budgeting that requires that before an allocation of resources to a certain activity, then the costs to be incurred must be justified, it also look into the costs and areas to prioritize.
Advantage of conventional budgeting system over Zero based system
- Conventional budgeting system is relatively easy to use since managers only need to adjust some figures of previous budget t get current budgets figures. The method takes a business as a going on concern and it is the same concern it uses to seek explanation only for differences.
- The method appreciates that changes in a budget are minimal and gradual; it is a logical method that address only the material differences in budget
- Managers are able to operate departments without conflicts and on consistency basis since a platform is set by a previous performance
- Coordination between budgets is easy, again any deviation from consistency is addresses accordingly
Disadvantage of conventional budgeting system over Zero based system
- Unlike in Zero-based budgeting, the method assumes that costs are constant or they follow a certain predictable change; this is not always the case.
- Basing budgets on previous year’s performance deny employees a right to exercise innovation and other ways of doing things
- It does not address priority changes (Cleverly & Cameron, 2007).
Cleverly, W. O., & Cameron, A. E. (2007). Essentials of health care finance. Sudbury: Jones and Bartlett.
Gapenski, C. (2008). Healthcare Finance: An Introduction to Accounting and Financial Management. Michigan: Health Administration Press.
Penner, J. (2003). Introduction to health care economics & financial management: fundamental concepts with practical applications. Baltimore: Lippincott Williams & Wilkins.