Discussion 03.2: Grouping Expenses

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Chapter 6: Expenses (Outflow)

Overview: The Distinction Between Expense and Cost (1 of 3)

  • Expenses are expired costs that have been used up, or consumed, while carrying on business.
  • Expense in the broadest sense includes every expired (used up) cost that is deductible from revenue.

Overview: The Distinction Between Expense and Cost (2 of 3)

  • “Cost” is the amount of cash expended* in consideration of goods or services received (or to be received).

* Or property transferred, services performed, or liability incurred.

Overview: The Distinction Between Expense and Cost (3 of 3)

  • Costs can either be expired or unexpired.
  • Expired costs are used up in the current period and are matched against current revenues.
  • Unexpired costs are not yet used up and will be matched against future revenues.

Overview: Confusion Over
Other Terminology

  • Confusion also exists over the term “cost” versus the term “charges”
  • Charges are revenue, or inflow
  • Costs are expenses, or outflows
  • Charges add; costs take away

Disbursements for Services (1 of 2)

  • Disbursements for services represent an expense stream (an outflow)
  • Disbursements for services can trigger payment either:
  • when the expense is incurred; or
  • after the expense is incurred.

Disbursements for Services (2 of 2)

  • Payment when the expense is incurred does not require the expense to enter the Accounts Payable account.
  • Payment after the expense is incurred requires that the expense be recorded in the Accounts Payable account.
  • It is then cleared from Accounts Payable when payment is made.

Grouping Expenses for
Planning and Control

  • Grouping by Cost Center
  • One form of responsibility center

(Study examples in Exhibits 6-1 and 6-2.)

Grouping by Diagnoses and Procedure

  • Beneficial because is matched costs and common classifications of revenues

(Study the examples in Exhibits 6-3, 6-4, 6-5, and Table 6-1.)

Grouping by Care Settings

  • By care settings recognizes different sites where service is delivered.
  • Care settings were discussed in the previous chapter.

Grouping by Service Lines

  • By service lines would be used for grouping costs if revenues were divided by service line.
  • Service lines were discussed in the previous chapter.

Grouping by Programs

  • Distinguishes projects that possess their own objectives, funding, and indicators

(Study the example in Exhibit 6-6.)

Cost Reports as Influencers of
Expense Formats (1 of 2)

  • Since the mid-1960s Annual Cost Reports are required by the Medicare Program and the Medicaid Program.

Cost Reports as Influencers of
Expense Formats (2 of 2)

  • The arrangement of costs into “Cost Centers” (on the cost report) has strongly influenced the arrangement of expense line items in many healthcare information systems.

Grouping Expenses by
Cost Center: Example

  • Example: A nursing home may consider the Admitting Department as a cost center.
  • In this case, the expenses grouped under the Admitting Department may include:
  • Administrative and Clerical Salaries
  • Admitting Supplies
  • Dues
  • Periodicals and Books
  • Employee Education
  • Purchased Maintenance

Grouping Expenses by Cost Center: Practice Exercise 6-1 (1 of 2)

  • The Metropolis Health System groups expenses for the Intensive Care Unit into its own cost center. Lab and Laundry expenses are likewise grouped into their own cost centers. Required:

Setup a worksheet with columns across the top for three cost centers: Intensive Care Unit, Lab, and Laundry.

Indicate the appropriate cost center for each of the following expenses (see following slide).

Grouping Expenses by Cost Center: Practice Exercise 6-1 (2 of 2)

Drugs Requisitioned Pathology Supplies Detergents and Bleach Nursing Salaries Clerical Salaries Uniforms (for Laundry Aides) Repairs (parts for microscopes)

Laundry

X

X

X

Laboratory

X

X

X

Intensive

Care Unit

X

X

X

Grouping Expenses by
Cost Center: Assignment 6-1 (1 of 2)

  • The Metropolis Health System’s Rehabilitation and Wellness Center offers outpatient therapy and return-to-work services plus cardiac and pulmonary rehabilitation to get people back to a normal way of living.
  • The Rehabilitation and Wellness Center expenses include the following (see following slide):

Grouping Expenses by
Cost Center: Assignment 6-1 (2 of 2)

Nursing Salaries Physical Therapist Salaries Occupational Therapist Salaries Cardiac Rehab Salaries Pulmonary Rehab Salaries Patient Education Coordinator Salary Nursing Supplies Physical Therapist Supplies Occupational Therapist Supplies Cardiac Rehab Supplies Pulmonary Rehab Supplies Training Supplies Clerical Office Supplies Employee Education Administrative/Clerical salaries

Administrative

X

X

Training

X

X

X

Cardiac

Pulmonary

X

X

X

X

X

X

X

Physical/Occupational

Therapy Rehab

X

X

X

X

X

X

X