Finance and Management Case Study

C h a p t e r 6 : C o s t A c c o u n t i n g 1 4 9

same study found that 5 percent of the patients accounted for more than 50 percent of all healthcare spending. Data usage in the past has been on volume and profit, while data usage in the future will be on finding best practices and comparing costs between different treatment options (Selivanoff 2011). Also, costing methods in the past have included ratio of costs-to-charges and job-order costing, while costing methods in the future will be on activity-based costing in an attempt to identify and reduce both direct and indirect costs.

relAtIonsHIP of costs to volume And revenue For purposes of determining profit or loss, managers must review costs in relation to asso- ciated volumes and revenues (sometimes referred to as cost-volume-profit analysis). The profit equation is

Profit = Revenues – Expenses

Therefore, the manager first must understand the relationship between costs and expenses. Within this context, cost is the amount spent to acquire an asset, and expense is the amount spent consuming the asset. Therefore, expense is an expired asset. As refer- enced earlier in this chapter, costs can be classified as fixed costs and variable costs. When classifying these costs in relation to an accounting period, fixed costs remain constant and variable costs change in relation to volume, as demonstrated in Exhibit 6.5.

exHIbIt 6.5 Costs per Period

Fixed cost

Profit

Volume

Ch ar

ge /C

os t

Loss

Breakeven point

Total revenue (Charge × volume)

Total cost (Unit cost × volume)

Variable cost

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EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 1/18/2019 12:12 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 867406 ; Nowicki, Michael.; Introduction to the Financial Management of Healthcare Organizations Account: shapiro