health care finance assignment week 3

Part II: Record Financial Operations

CHAPTER 6: COST CLASSIFICATIONS

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).

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).

Practice Exercise 6-1: Identifying Direct & Indirect Cost

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.

Figure 6–1 Assigning Costs to the Cost Object.

• 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.

Why the Difference Is Important to Management

Exhibit 6-1: Example of Direct Costs

Exhibit 6–2 Example of Ambulance Indirect Costs

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.

• Another term for responsibility center is “profit center”.

• Responsibility Center information is especially important because the Manager is responsible for the operation.

• Study the Westside Center example in the chapter carefully.

Figure 6–2 Lines of Managerial Responsibility at Westside Center

Courtesy of Resource Group, Ltd., Dallas, Texas.

Exhibit 6–3 Director’s Summary of Westside ASC and Rehab Responsibility Center

Courtesy of Resource Group, Ltd., Dallas, Texas.

• 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.

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”.

Distinction Between Product and Period Costs

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.

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.