Cost Behavior and Allocation
Assignment 2: Cost Behaviors and Allocation
Prof. Gilton Grange
HSA 525
Analyze the complexity of cost behaviors in health care organizations and describe how costs are classified according to their relationship with volume. Health services managers are vitally interested in how costs are affected by changes in volume. Before costs can be managed, one must have an understanding of how and why costs are being incurred. For, example medications dispensed from the pharmacy are variable costs items since the more often medications are dispensed to the patient, the higher to the total medication costs (Lang, 2012). In this example the cost is driven by the prescription of the medication for the patient, which leads to dispensing the medication and incurring the cost. If the medication is not prescribed the total cost would be zero. The salary of the Director of the Pharmacy is a fixed cost, at least over the short run because that person is paid the same salary regardless of how many, or how few, prescriptions they fill. The text defines the relationship between an organization’s total costs and volume as cost behavior or underlying cost structure, is used by mangers in planning, control, and decision making. The primary reason for defining and organization’s underlying cost structure is to provide healthcare managers with a tool for forecasting cost and profits at different volume levels (Gapenski, 2012). The cost structure of both fixed and variable costs- that is some of the costs are expected to be volume sensitive and some are not- is typical in healthcare organizations. Total variable costs increase or decrease proportionately as volume changes, but variable cost rate remains constant as long as volume remains within the relevant range. Fixed, costs, in contrast to total variable costs, remain unchanged as the volume varies. The Academy of Healthcare Management Journal states, when attempting to improve profitability by decreasing or controlling
Prof. Gilton Grange
HSA 525
Analyze the complexity of cost behaviors in health care organizations and describe how costs are classified according to their relationship with volume. Health services managers are vitally interested in how costs are affected by changes in volume. Before costs can be managed, one must have an understanding of how and why costs are being incurred. For, example medications dispensed from the pharmacy are variable costs items since the more often medications are dispensed to the patient, the higher to the total medication costs (Lang, 2012). In this example the cost is driven by the prescription of the medication for the patient, which leads to dispensing the medication and incurring the cost. If the medication is not prescribed the total cost would be zero. The salary of the Director of the Pharmacy is a fixed cost, at least over the short run because that person is paid the same salary regardless of how many, or how few, prescriptions they fill. The text defines the relationship between an organization’s total costs and volume as cost behavior or underlying cost structure, is used by mangers in planning, control, and decision making. The primary reason for defining and organization’s underlying cost structure is to provide healthcare managers with a tool for forecasting cost and profits at different volume levels (Gapenski, 2012). The cost structure of both fixed and variable costs- that is some of the costs are expected to be volume sensitive and some are not- is typical in healthcare organizations. Total variable costs increase or decrease proportionately as volume changes, but variable cost rate remains constant as long as volume remains within the relevant range. Fixed, costs, in contrast to total variable costs, remain unchanged as the volume varies. The Academy of Healthcare Management Journal states, when attempting to improve profitability by decreasing or controlling
References: Gapenski, L. C. (2012). Healthcare finance. An introduction to accounting and financial management. (5th ed.) Health Administration Press, Chicago Illinois. Lang, T., & Jones, R. (2012). Cost Behavior ASA Significant Factor In Predicting The Quality And Success Of Hospitals: A Literature REVIEW. Academy Of Health Care Management Journal, 8(1/2), 3-8.