Discussion: Cost Accounting After completing this week’s readings, including, “ ,” describe the ways in which healthcare financial managers use financial resources and cost classifications to allocate indirect costs to direct costs when determining patient charges. Also, explain how utilization rates are related to volumes and revenue generation. Reading article attached below please use in addition to other articles to answer
Cost accounting is a crucial tool used by healthcare financial managers to allocate indirect costs to direct costs when determining patient charges. Indirect costs, also known as overhead costs, include expenses such as administrative costs, utilities, and maintenance, which are not directly attributable to a specific patient or service. On the other hand, direct costs are those that can be directly linked to a specific patient or service, such as medications, lab tests, and equipment.
To allocate indirect costs to direct costs, healthcare financial managers utilize cost classifications. Cost classifications involve categorizing costs based on different criteria, such as by function, behavior, or traceability. The function-based classification assigns costs according to the activities or departments within the healthcare organization. This allows managers to allocate the indirect costs of each department to the direct costs associated with that department.
For example, if the administrative department incurs $100,000 of indirect costs, and the department serves 10,000 patients, each patient would be allocated $10 of indirect costs as part of their patient charges. Similarly, if the radiology department incurs $200,000 of indirect costs and serves 5,000 patients, each patient would be allocated $40 of indirect costs.
The behavior-based classification categorizes costs as fixed or variable. Fixed costs do not change with the level of activity or patient volume, such as rent or insurance premiums. Variable costs, on the other hand, vary with the level of activity or patient volume, such as supplies or staffing costs. By understanding the behavior of costs, healthcare financial managers can accurately allocate indirect costs to direct costs based on the level of patient volume.
For instance, if a hospital has fixed indirect costs of $500,000 and variable indirect costs of $10 per patient, the total indirect costs for 1,000 patients would be $510,000 (i.e., $500,000 + $10 x 1,000). Each patient would then be allocated $510 of indirect costs as part of their charges.
Utilization rates play a significant role in the relationship between volumes and revenue generation. Utilization rates refer to the percentage of a healthcare facility’s available capacity that is being utilized. It is calculated by dividing the number of services provided by the maximum number of services that could have been provided. For example, if a department offers 100 services in a month, but it could have provided 200 services based on its available resources, the utilization rate would be 50%.
Utilization rates are directly related to volumes and revenue generation. Higher utilization rates indicate that the healthcare facility is using its resources more efficiently and effectively, resulting in increased volumes of patients. As the number of patients increases, so does the revenue generated from patient charges.
For instance, if a hospital has a maximum capacity of 100 patients per day but is only operating at a utilization rate of 50%, it means that on average, there are only 50 patients admitted per day. By increasing the utilization rate to 80%, the hospital would be able to admit 80 patients per day, resulting in increased patient volumes and subsequently higher revenue generation.
In conclusion, healthcare financial managers use cost accounting techniques to allocate indirect costs to direct costs when determining patient charges. Cost classifications, such as function-based and behavior-based classifications, enable managers to allocate indirect costs accurately based on the activities and behavior of costs. Utilization rates, on the other hand, play a vital role in determining the relationship between volumes and revenue generation. Higher utilization rates indicate increased volumes of patients and, consequently, higher revenue generation. By effectively managing and understanding cost allocation and utilization rates, healthcare financial managers can optimize resource utilization and financial performance.