Financial Management_7_

					                      Cost Accounting

Learning Objectives

1. Explain the methods of classifying costs.

2. Explain the methods of allocating costs.

3. Explain the methods of assembling costs.

4. Understand the relationship of costs to volume and revenue.




                            Cost Accounting
               Cost Accounting

Study of costs including the methods
for classifying costs, allocating costs,
assembling costs, and determining
product costs.




                      Cost Accounting
      Methods of Classifying Costs

by accounting function
  -Financial accounting, or accounting, costs
  -Managerial accounting, or financial, costs




                      Cost Accounting
     Methods of Classifying Costs

by management function
  -Operating costs
  -Nonoperating costs




                        Cost Accounting
       Methods of Classifying Costs

by traceability
   -Direct costs
   -Indirect costs
   -Full costs
   -Average costs




                     Cost Accounting
      Methods of Classifying Costs

by behavior in relation to products or
services
   -Variable costs
   -Fixed costs
   -Semi-variable costs
   -Marginal costs




                          Cost Accounting
       Methods of Classifying Costs

by relevance to control and decision
making
  -True costs
  -Controllable costs
  -Uncontrollable costs
  -Differential or incremental costs
  -Sunk costs
  -Opportunity costs
  -Relevant costs
  -Actual costs
  -Standard costs

                           Cost Accounting
       Methods of Allocating Costs

--process of allocating both direct and indirect
   costs from the departments that do not
   generate charges to the departments that do
   generate charges (a.k.a. cost finding, cost
   analysis)




                     Cost Accounting
       Methods of Allocating Costs

• Prerequisites to cost allocation
   – Organizational chart and chart of accounts
   – Responsibility accounting
   – Segregate cost centers from revenue
    centers
   – Accurate and prompt accounting systems
   – Comprehensive information system
   – Predetermined cost allocation method


                       Cost Accounting
      Methods of Allocating Costs

Direct apportionment—one-time allocation from
  NR departments (departments that do not
  generate revenue) to R departments (those
  that do generate revenue)




                   Cost Accounting
       Methods of Allocating Costs

Step-down apportionment--two-time
allocation--the first allocation among
NR departments and the final
allocation from NR departments to R
departments




                     Cost Accounting
      Methods of Allocating Costs

Double apportionment--two-time
allocation--the first allocation among
NR departments and at the same time,
among R departments, before the
final allocation from NR departments
to R departments



                    Cost Accounting
       Methods of Allocating Costs

Multiple, or algebraic, apportionment--two-time
 allocation, but includes multiple allocations
 among NR departments and multiple
 allocations among R departments before the
 final allocation from NR departments to R
 departments




                    Cost Accounting
      Methods of Allocating Costs

While multiple apportionment is the
most accurate, double apportionment
is the most practical.




                   Cost Accounting
Methods of Assembling Costs




          Cost Accounting
     Methods of Assembling Costs

Once the healthcare organization has allocated
 costs by a method that ensures that patients
 are paying for their fair share of costs, the
 organization chooses a method, or methods,
 of assembling costs in ways that are
 meaningful to management.




                   Cost Accounting
     Methods of Assembling Costs

Responsibility costing—assembling controllable
 costs by responsibility center for control and
 accountability.




                    Cost Accounting
      Methods of Assembling Costs

Full costing--assembling direct costs and
  allocated share of indirect costs for rate
  setting and profitability determination.




                     Cost Accounting
       Methods of Assembling Costs

Differential or incremental costing-- assembling present
   and future costs, and sometimes revenues, to
   alternatives for the purpose of making a selection.
   Includes the following steps:
   1) gather all costs and revenues associated with each
      alternative
   2) identify and drop all sunk costs
   3) identify and drop all costs and revenues that do not differ
      between alternatives
   4) select best alternative



                            Cost Accounting
          Differential Cost Analysis

• Last week your clinic bought a new piece of lab
  equipment for $100,000. The piece of equipment will
  perform 100,000 tests over its useful life and total
  variable costs are $3 per test, and you’re planning to
  charge $5 per test.
• This week a competing lab equipment manufacturer
  introduced a similar piece of equipment for the same
  price (in effect, the introduction of this equipment
  made the resale or trade-in value of your equipment
  $0), but total variable costs are $1 per test.
• Using differential costs analysis, would you keep your
  old piece of Equipment, or would you buy the new
  piece of equipment?

                       Cost Accounting
           Differential Cost Analysis
Step 1--Gather all costs and revenues
associated with each alternative.


                                        Keep Old        Buy New
   Revenue                                   $500,000    $500,000
   Fixed Cost
    Old                                       100,000     100,000
    New                                                   100,000
   Variable Cost                              300,000     100,000
   Full Cost Gain/(Loss)                     $100,000    $200,000



                           Cost Accounting
            Differential Cost Analysis

Step 2--Identify and drop all sunk costs
(100,000 fixed cost for old)


                                     Keep Old        Buy New
    Revenue                               $500,000    $500,000
    Fixed Cost
     Old
     New                                               100,000
    Variable Cost                          300,000     100,000




                        Cost Accounting
            Differential Cost Analysis
Step 3--Identify and drop all costs and
revenues that do not differ (500,000 revenue
for each alternative)

                                     Keep Old       Buy New
    Revenue
    Fixed Cost
     Old
     New                                              100,000
    Variable Cost                         300,000     100,000




                        Cost Accounting
             Differential Cost Analysis
Step 4--Select the best alternative based on
the remaining cost and revenue information
(buy new equipment, which has less cost).


                                             Keep Old      Buy New
   Revenue
   Fixed Cost
    Old
    New                                                      100,000
   Variable Cost                                 300,000     100,000
   Differential Cost Gain/(Loss)             ($300,000)    ($200,000)


                               Cost Accounting
    Methods of Determining Product
                Costs

Ratio of costs to charges--a method of
  determining product cost by associating or
  relating its cost to its charge.
Process costing--a method of determining
  product cost by dividing full costs by units
  produced.
Job order costing--a method of determining
  product cost by sampling the product’s actual
  direct costs and then developing a relative
  value unit.
                    Cost Accounting
             Job Order Costing

Using job order costing, develop an RVU and
 product cost for the following CT procedures
 given the projected volumes and sample
 direct costs. Projected total costs for the CT
 Department are $10,000,000 ($6,000,000 in
 direct costs and $4,000,000 in indirect costs).




                    Cost Accounting
            Job Order Costing




Procedure     Projected          Labor      Supply
               Volume           Expense    Expense

   A           1,000                  60     30
   B           2,000                  50     20
   C           4,000                  25     10
   D           5,200                  20     05



                    Cost Accounting
                  Job Order Costing

Stage 1--Calculate the RVU for each
procedure


      Procedure      Total Sample           ÷ Greatest   RVU
                    Direct Expense           Common
                                           Denominator
         A               90                    5         18
         B               70                    5         14
         C               35                    5          7
         D               25                    5          5


                         Cost Accounting
                    Job Order Costing

Stage 2--Calculate the total cost for each procedure.
Step 1--Calculate the total RVUs



        Procedure     RVU          x Projected   = Total
                                    Volumes      RVUs
           A           18             1,000      18,000
           B           14             2,000      28,000
           C           7              4,000      28,000
           D           5              5,200      26,000
          Total                                  100,000

                            Cost Accounting
              Job Order Costing

Step 2--Calculate the cost/RVU

       $10,000,000 ÷ 100,000 = $100




                      Cost Accounting
                Job Order Costing

Step 3--Calculate the cost/procedure



        Procedure   Cost/RVU      RVUs     Cost/
                                         Procedure

            A         100           18     1,800
            B         100           14     1,400
            C         100            7     700
            D         100            5     500



                       Cost Accounting
    Methods of Determining Product
                Costs

Activity-based costing--a method of
determining product cost by using
cost drivers to assign indirect costs to
products.




                     Cost Accounting
             Activity-Based Costing
Using activity-based costing, develop a product cost for the
  following CT procedures using labor expense and
  supply expense to assign direct costs and machine
  minutes as a cost driver to assign indirect costs.
  Projected total costs for the CT Department are
  $10,000,000--$6,000,000 in direct costs and $4,000,000
  in indirect costs.




                        Cost Accounting
            Activity-Based Costing



Procedure     Projected       Labor          Supply   Equipment
              Volumes        Expense        Expense     Use

   A           1,000            60            30         30
   B           2,000            50            20         30
   C           4,000            25            10         20
   D           5,200            20            5          10




                          Cost Accounting
            Activity-Based Costing

Stage 1--Calculate the RVU and the
cost driver for each procedure
Step 1--Calculate the direct RVU

     Procedure   Total Sample        ÷ GCD      = RVU
                  Direct Cost

        A            90                     5    18
        B            70                     5    14
        C            35                     5     7
        D            25                     5     5

                          Cost Accounting
              Activity-Based Costing

Stage 1--Calculate the direct RVU and the
indirect cost driver for each procedure
Step 2--Calculate the indirect cost driver (CD)


       Procedure   Total Sample       ÷ GCD     = Indirect CD
                   Indirect Cost

          A             30                 10        3
          B             30                 10        3
          C             20                 10        2
          D             10                 10        1


                         Cost Accounting
               Activity-Based Costing

Stage 2--Calculate the total cost/procedure
Step 1--Calculate the total direct RVUs


     Procedure    RVU    X Projected      = Total RVUs
                           Volume
        A         18         1,000          18,000
        B         14         2,000          28,000
        C          7         4,000          28,000
        D          5         5,200          26,000
       Total                                100,000

                        Cost Accounting
               Activity-Based Costing

Stage 2--Calculate the total cost/procedure
Step 2--Calculate the total indirect CDs


     Procedure    CD    X Projected      = Total CDs
                          Volume
        A          3        1,000          3,000
        B          3        2,000          6,000
        C          2        4,000          8,000
        D          1        5,200          5,200
       Total                               22,200

                       Cost Accounting
            Activity-Based Costing

Stage 2--Calculate the total cost/procedure
Step 3--Calculate the direct cost/RVU

      $6,000,000 ÷ 100,000 = $60




                       Cost Accounting
            Activity-Based Costing

Stage 2--Calculate the total cost/procedure
Step 4--Calculate the indirect cost/CD

      $4,000,000 ÷ 22,200 = $180.18




                       Cost Accounting
              Activity-Based Costing

Stage 2--Calculate the total cost/procedure
Step 5--Calculate the direct cost/procedure


       Procedure    Direct           RVU    Direct Cost/
                   Cost/RVU                 Procedure

          A          60               18       1,080
          B          60               14        840
          C          60                7        420
          D          60                5        300


                          Cost Accounting
              Activity-Based Costing

Stage 2--Calculate the total cost/procedure
Step 6--Calculate the indirect cost/procedure


       Procedure   Indirect          CD    Indirect Cost/
                   Cost/CD                   Procedure

          A        180.18             3       540.54
          B        180.18             3       540.54
          C        180.18             2       360.36
          D        180.18             1       180.18


                         Cost Accounting
             Activity-Based Costing

Stage 2--Calculate the total cost/procedure
Step 7--Calculate the total cost/procedure


 Procedure   Direct Cost/         + Indirect Cost/   = Total Cost/
             Procedure               Procedure        Procedure
    A           1,080                  540.54             1,620.54
    B            840                   540.54             1,380.54
    C            420                   360.36               780.36
    D            300                   180.18               480.18



                            Cost Accounting
    Methods of Determining Product
                Costs

Standard costing--not a method of determining
  costs per se, but a method of establishing
  benchmark costs




                   Cost Accounting
               Break-Even Analysis

Your home health care agency is considering a new
  product with a fixed cost of $1,000, a charge of $10
  per unit, and a variable cost of $5.
  – What is the break-even point in quantity? In dollars?
  – What is the contribution margin in dollars? In percent?




                         Cost Accounting
                 Break-Even Analysis

                        TFC           1, 000
BE in quantity     =              =            = 200 units
                       P - VC         10 - 5

BE in $ = BE in units x P             = 200 x 10      = $2,000

Contribution Margin in $            = P - VC = $10 - $5 = $5

                                     P - VC 10 - 5
Contribution Margin in %           =       =       = . 50
                                        P     10

                           Cost Accounting

				
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posted:5/23/2012
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