Chapter 7 for Wk 3 Checkpoint
CHAPTER
Cost Classifications
DISTINCTION BETWEEN DIRECT AND
INDIRECT COSTS
Direct costs can be specifically associated with a particular unit or department or patient. The critical distinction for the manager is that the cost is directly attributable. Whatever the manager is responsible for—that is, the unit, the department, or the patient—is known as a cost object.
The somewhat vague definition of a cost object is any unit for which a separate cost measurement is desired. It might help the manager to think of a cost object as a cost objective instead.1 The important thing is that direct costs can be traced. Indirect costs, on the other hand, cannot be specifically associated with a particular cost object.
The controller’s office is an example of indirect cost.
The controller’s office is essential to the overall organization itself, but its cost is not specifically or directly associated with providing healthcare services. The critical distinction for the manager is that indirect costs usually cannot be traced, but instead must be allocated or apportioned in some manner.2 Figure 6-1 illustrates the direct–indirect cost distinction.
To summarize, it is helpful to recognize that direct costs are incurred for the sole benefit of a particular operating unit—a department, for example. As a rule of thumb, if the answer to the following question is “yes,” then the cost is a direct cost: “If the operating unit (such as a department) did not exist, would this cost not be in existence?” Indirect costs, in contrast, are incurred for the overall operation and not for any one unit. Because they are shared, indirect costs are sometimes called joint costs or
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6
Progress Notes
After completing this chapter, you should be able to
1. Distinguish between direct and indirect costs.
2. Understand why the difference is important to management.
3. Understand the composition and purpose of responsibility centers. 4. Distinguish between
Cost Classifications
DISTINCTION BETWEEN DIRECT AND
INDIRECT COSTS
Direct costs can be specifically associated with a particular unit or department or patient. The critical distinction for the manager is that the cost is directly attributable. Whatever the manager is responsible for—that is, the unit, the department, or the patient—is known as a cost object.
The somewhat vague definition of a cost object is any unit for which a separate cost measurement is desired. It might help the manager to think of a cost object as a cost objective instead.1 The important thing is that direct costs can be traced. Indirect costs, on the other hand, cannot be specifically associated with a particular cost object.
The controller’s office is an example of indirect cost.
The controller’s office is essential to the overall organization itself, but its cost is not specifically or directly associated with providing healthcare services. The critical distinction for the manager is that indirect costs usually cannot be traced, but instead must be allocated or apportioned in some manner.2 Figure 6-1 illustrates the direct–indirect cost distinction.
To summarize, it is helpful to recognize that direct costs are incurred for the sole benefit of a particular operating unit—a department, for example. As a rule of thumb, if the answer to the following question is “yes,” then the cost is a direct cost: “If the operating unit (such as a department) did not exist, would this cost not be in existence?” Indirect costs, in contrast, are incurred for the overall operation and not for any one unit. Because they are shared, indirect costs are sometimes called joint costs or
49
6
Progress Notes
After completing this chapter, you should be able to
1. Distinguish between direct and indirect costs.
2. Understand why the difference is important to management.
3. Understand the composition and purpose of responsibility centers. 4. Distinguish between