Fixed and Variable Costs

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Health services managers are essentially interested in how costs are affected by changes in volume. Cost behavior refers to a cost's reactions to activity level. A cost may rise, fall, or remain constant as activity levels fluctuate. We can classify several types of costs on the basis of their relationship to the amount of services provided, often referred to as activity, utilization, or volume (Gapenski, 2012). When dealing with the future there is a level of uncertainty of volume with regard to inpatient days, number of emergency visits, number of unforeseen complications, number of additional unaccounted for testing procedures and so on. The many costs incurred by the healthcare organization can be classified as variable, fixed, or semi-fixed costs.

Understanding the appropriate classification of these cost's behaviors serves management through providing specific process and product information necessary for a successful operation. The primary reason for defining an organization's underlying cost structure is to provide healthcare managers with a tool for forecasting costs and profits at different volume levels (Gapenski, 2012). Cost classifications apply within a relevant activity range. This range pertains to a measure of volume in which the costs are applicable to a particular time period.

Fixed costs are known with certainty, regardless of the level of volume within the relevant range (Gapenski, 2012). For example, the State University of New York has a labor force of well trained professors and staff who are capable of handling up to ____ students. This force will be increased or decreased only under unusual circumstances. As long as admission falls between ___ and ___, labor costs at SUNY are fixed for the coming year, regardless of the number of admissions. No costs are fixed over the long run due to healthcare businesses incurring additional fixed costs for new buildings and medical equipment, additional specialty providers, and so on.

Costs...
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