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Expenses

Account Account 10 Month Annualized 12 Month

Social Security 50,431 60,517

Pension 17,229 20,675

Health Insurance 7,018 8,422

Child Care 3,803 4,564

Patient Accounting 129,463 155,356

Admitting 91,878 110,254

Medical Records 76,432 91,718

Dietary 22,938 27,526

Medical Waste 1,981 2,377

Sterile Procedures 65,600 78,720

Laundry 33,911 40,693

Depreciation—Equipment 72,815 87,378

Depreciation—Building 34,481 41,377

Amortization—Interest (4,849) (5,819)

Insurance 3,513 4,216

Administration 48,305 57,966

Medical Staff 1,435 1,722

Community Relations 41,511 49,813

Materials Management 53,811 64,573

Human Resources 25,888 31,066

Nursing Administration 68,726 82,471

15.5 MAKING DATA COMPARABLE This section discusses annualizing partial-year expenses, along with using inflation factors, standardized measures, and currency measures. The manager needs to know how to make data comparable as a basis for properly preparing and/or reviewing budgets and reports.

Annualizing

Because comparability requires consistency, the manager needs to know how to annualize partial-year expenses. Table 15–2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl2) sets out the actual 10-month expenses for the operating room. But these expenses are going to be compared against a 12-month budget. What to do? The actual 10-month expenses are converted, or annualized, to a 12-month basis, as shown in the second column of Table 15–2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl2) .

Table 15–2 Annualizing Operating Room Partial-Year Expense

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Data Processing 14,846 17,815

Fiscal 14,750 17,700

Telephone 2,366 2,839

Utilities 22,005 26,406

Plant 64,664 77,597

Environmental Services 27,395 32,874

Safety 1,680 2,016

Quality Management 8,347 10,016

Medical Staff 7,870 9,444

Continuous Quality Improvement 4,079 4,895

EE Health 474 569

Total Allocated 1,014,796 1,217,756

All Other Expenses 1,009,673 1,211,608

Total Expense 2,024,469 2,429,364

Reproduced with the permission of Wolters Kluwer Law & Business from J.J. Baker, Activity-Based Costing and Activity-Based Management for Health Care, p. 190, © 1998, Aspen Publishers, Inc.

These computations were performed on a computer spreadsheet; however, the calculation is as follows. Using the first line as an example, $50,431 is 10-months worth of expenses; therefore, 1 month’s expense is one-tenth of $50,431, or $5,043. To annualize for 12-months worth of expenses, the 10-month total of $50,431 is increased by 2 more months at $5,043 apiece ($50,431 plus $5,043 for month 11, plus another $5,043 for month 12, equals $60,517, the annualized 12-month figure for the year).

Inflation Factors

Inflation means “an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level.” An inflation factor is used to compute the effect of inflation.

Let’s assume that hospital 1’s General Services expenses for year 1 were $800,000, versus $900,000 for year 2. We can assume that these amounts reflect actual dollars expended in each year. But let us also now assume that inflation caused these expenses to rise by 5% in year 2. If the Chief Financial Officer (CFO) decides to take such inflation into account, a government source will be available to provide the appropriate inflation rate. (The 5% in our example is for illustration only and does not reflect an actual rate.)

The inflation factor for this example is expressed as a factor of 1.05 (1.00 plus 5% [expressed as.05] equals 1.05). The CFO might apply the inflation factor to year 1 in order to give it a spending power basis equivalent to that of year 2. (Applying an inflation factor for a two-year comparison is not usually the case, but let us assume the CFO has a good reason for doing so in this case.) The computation would thus be $800,000 year 1 expense times the 1.05 inflation factor equals an inflation- adjusted year 1 expense figure of $840,000.

However, if the CFO wants to apply an inflation factor to a whole series of years, he or she must account for the cumulative effect over time. An example appears in Table l5–3 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl3) . We assume a base of $500,000 and an annual inflation rate of 10%. The inflation factor for the first year is 10%, converted to 1.10, just as in the previous example, and $500,000 multiplied by 1.10 equals $550,000 in nominal dollars.

1

(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_6a#ch15_ent1)

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SOURCE OF FACTOR IN COLUMN C BELOW: From the Compound Interest Look-Up Table “The Future Amount of $1.00” (Appendix 13-B (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_app2#ch13_app2) )

Year Factors as shown at 10%

1 1.100

2 1.210

3 1.331

4 1.464

(A) (B) (C) (D)

Year Real Dollars

Cumulative Inflation Factor* (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15tabfn1)

Nominal Dollars** (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15tabfn2)

1 $500,000 (1.10) = 1.100 $550,000

2 500,000 (1.10) = 1.210 605,000

3 500,000 (1.10) = 1.331 665,500

4 500,000 (1.10) = 1.464 732,050

*Assume an annual inflation rate of 10%. Thus 1.00 + 0.10 = the 1.10 factor in Column C.

**Column D “Nominal Dollars” equals Column B times Column C.

Table 15–3 Applying a Cumulative Inflation Factor

Beyond the first year, however, we must determine the cumulative inflation factor. For this purpose we turn to the Compound Interest Table. It shows “The Future Amount of $1.00,” and appears in Appendix B of the chapter about time value of money. “The Future Amount of $1.00” table has years down the left side (vertical) and percentages across the top (horizontal). We find the 10% column and read down it for years one, two, three, and so on.

As shown in Table 15–3.2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl3.2) , the factor for year 2 is 1.210, for year 3 is 1.331, and so on. We carry those factors to column C of Table 15–3.1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl3) . Now we multiply the $500,000 in column B times the factor for each year to arrive at the cumulative inflated amount in column D. Thus $500,000 times the year 2 factor of 1.210 equals $605,000, and so on.

Table 15–3.2

1

2

3

4

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Country (or Area) Currency

Canada Canadian dollar

China Yuan

Euro Area Euro

Japan Yen

Mexico Peso

United Kingdom Pound

Exhibit 15–1 Foreign Currency Examples

Currency Measures

Monetary unit measurement, and the related currency measures and currency conversions, are typically beyond most manager’s responsibilities. Nevertheless, it is important for the manager to understand that consistency in applying such measures and conversions will be a significant factor in expressing financial results of companies that have global operations.

Therefore, for comparative purposes we must determine if all the information being prepared or under review is measured by the same monetary unit. A few foreign currency examples are illustrated in Exhibit 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_exhibit1) . Currencies are typically converted for financial reporting purposes using the U.S.dollar foreign exchange rates as of a certain date.

Exchange rates may be expressed in two ways: “in U.S. dollars” or “per U.S. dollars.” For example, assume the euro is trading at 1.3333 in U.S. dollars and at 0.7500 per U.S. dollars. That means if you were spending your U.S. dollar in, say, France (part of the “euro area”), it would take a third as much (1.33) in your dollars to buy products priced in euros. If your French friend, on the other hand, was spending euros for products priced in U.S. dollars, he or she could buy one-quarter more for his or her money (because the U.S. dollar would be worth only three quarters [0.7500] of the euro at that particular exchange rate).

Standardized Measures

A final word about standardized measures. Standardized measures aid comparability. They especially assist in performance measurement. Types of standardized measures include the typical hospital per-bed measure along with work load measures.

There is, of course, a whole array of uses for standardized measures. Managed care plans, for example, may use a standard set of measures that are applied to every physician who contracts with the plan. Each physician then receives a report from the plan that illustrates his or her performance.

Finally, electronic medical records (as further discussed in following chapters) depend upon standardized input. The input into various fields is standardized (and thus made comparable) by the very nature of the electronic system design.