FINANCIAL EXERCISE: COST MANAGEMENT 1
Financial Exercise: Cost Management
NURS 523 - Liberty University
Author Note
Financial Exercise: Cost Management
1. Basic cost concepts provide essential knowledge needed for nursing leaders. Discuss the cost
per service unit as it pertains to your area of responsibility. How does this impact the entire
organization? What is the impact of direct and indirect costs? Fixed and variable costs? Full
cost versus average costs? What is the relevant range?
A service unit is defined as the measurement of the services rendered by an organization
(Jones, 2018). In my area of responsibility which is Mother Baby or the post-partum unit our
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after birth, essentially it is the cost per patient day. Understanding of cost per patient days
enables a department to financially thrive. In my department, the more moms and babies
we have, the more patients we will need to treat and provide interventions for. If a patient
stays the bare minimum yet receives all the interventions in that shorter amount of time,
the department is fiscally sound. Of course, there are moments when a patient will stay
beyond their intended admission due diagnosis beyond the post-partum world. The shorter
admitted patient and the longer admitted are outliers and often balance each other.
Direct and indirect costs impact the overall cost for interventions and care. Direct
costs are those costs that happen with direct patient care and are the responsibility of the
manager of that department. Indirect costs are those costs that are everything else not
related to patient care. On my unit direct costs would be the products used to care for the
patient, lab work, medications, etc. Indirect includes the hourly compensation of the staff
who provide care to the patients (Jones, 2018).
According to Jones and company fixed and variables are a vital cost idea to
organizations (2018). A fixed cost is one that does not change even when the volume of
provision changes and variable is the opposite in that a costs will change with the expansion
of changes and costs (Jones, 2018). In my department an example of fixed cost would be the
salaries and benefits for the staff. A variable cost would be supplies and medications. Both
will increase when the daily census increases, and the need rises for those products.
Full costs are the sum of all expenditures connected with the department and
includes direct and indirect costs (Jones, 2018). Average costs is the entire cost divided by
the volume of service units (Jones, 2018). Full costs will include salaries, housekeeping,
supplies, maintenance, etc. Average costs would break down the full costs and average it
per patient (Jones, 2018).
Relevant range is a range of activity within a unit that is covered within the
FINANCIAL EXERCISE: COST MANAGEMENT 3
budget. Salaries are a fixed cost to the relevant range of a department however if the
average daily census shows a consistent rise then the prospect of hiring another manager or
assistant manager would need to come into focus which would cause that fixed cost to rise
due to the necessity of growth (Jones, 2018).
2. The cost to treat patients depend on many variables. One of the variables is volume. The
unit you manage has fixed costs of $575,000 and variable costs per patient day of $450.00.
The patient days equate to 3,500. What is the average cost per patient day?
1. Determine the variable cost = $450 x 3,500 = 1,575,000
2. Total cost = $575,000 + 1,575,000 = 2,150,000
3. Average cost per patient day = $2,150,000 divided by 3,500 = $614.29
3. What are cost estimation techniques? Discuss a technique and provide example(s) of when
you as a nurse leader would choose this approach.
Prediction of costs is a difficult part of financial management and yet it is vital for a
fiscally sound organization and department. One method is to look at a department’s
historical finance and behavior and judge the future by that standard. There can be a
disconnect with this method especially when trying to predict inflation (Jones, 2018). At the
current time, my department is booming with new moms and babies. We have surpassed
our average daily census almost weekly since the new fiscal year began in October. However,
this was not the case in 2020 when the pandemic first hit. Some women were choosing to
deliver at home with a midwife and our department was hit hard by these decisions. It was
hard to predict what the next fiscal year was going to do because we had historically been
successful and fiscally sound. We chose not to vary from our current budget with the
exception of taking into account for a slight inflation and as mentioned we have seen the
steady incline.
4. Break-Even Analysis (BEA) is a technique utilized to find specific volume at which a program
or service neither makes nor loses money. With the formula provided in your
FINANCIAL EXERCISE: COST MANAGEMENT 4
textbook/assigned readings, provide an example (hypothetical or from your personal
experience) that demonstrates this technique. Discuss the relationship between revenue
and expenses. Was the program or service profitable or depict a loss?
Hypothetically, my department has researched to offer physical therapy for
pelvic floor dysfunction to post-op c/section moms, and those with extensive perineal tears.
The fixed costs of providing therapy are $30,000. The cost for PT is $500 and will serve 600
patients. The variable cost is $300 when the PT visits the new mom. Taking $500 - $300 = 200
and dividing that into the fixed cost of $30,000 is 150 visits to break even with this new
undertaking.
5. How would you determine the staffing mix for an inpatient unit? Jones remarks on the
staffing mix being a challenge for understanding or clarifying hours for patient care is
difficult when looking at unit that employees a multitude of licensed and unlicensed staff
(2018). My specific unit has a staff that encompasses registered nurses and certified nursing
assistants. Our staffing matrix is broken into those two entities which provides an ease when
calculating how many staff members are needed on a given shift. The matrix is devised of
patient to nurse ratio which is based on recommendations from the Association of Women’s
Health, Obstetric, and Neonatal Nurses (AWHONN) which was researched and devised for
safe staffing (Simpson et al., 2019)
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References
Jones, C. (2018). Financial management for nurse managers and executives (5th Revised ed.).
Saunders.
Simpson, K., Lyndon, A., Spetz, J., Gay, C. L., & Landstrom, G. L. (2019). Adherence to the
awhonn staffing guidelines as perceived by labor nurses. Nursing for Women's Health,
23(3), 217–223. https://doi.org/10.1016/j.nwh.2019.03.003
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