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Course 4: Financial Management of Healthcare OrganizationsCase 1
LG.
1. What are the different kind of cost?
2. What is a cost-price calculation?
a. What is tariff?
3. What are different purposes to cost-price calculation (DOTs versus DBC)
4. What are different cost-pricing techniques?
5. Calculation of indirect cost?
6. Apply all to the case the techniques to the case, which tariff would you advise?
Gruen – The nature of costs (Chapter 3)
Key terms
- Cost profile: A typical pattern of the costs associated with a category of patient or group of
patients.
- Financial (budgetary) costs: The accounting costs of a good or service usually representing the
original (historical) amount paid, distinct form the opportunity costs.
- Fixed costs: A cost of production that does not vary with the level of output.
- Flexible budget: A budget showing comparative costs for a range of levels of activity.
- Opportunity (economic) costs: The value of the next best alternative forgone as a result of the
decision made.
- Semi-variable costs: Costs that contain both a fixed and a variable element.
- Stepped costs: Costs that behave like fixed costs until certain thresholds are reached; when
activity increases beyond each threshold, costs step to a higher level and remain fixed until the
next threshold level of activity is reached.
- Variable costs: A cost of production that varies directly with the level of output.
Some important distinctions
When financial manager refer to costs they are referring to financial costs: the monetary value of
resources (inputs). There is also a distinction between the cost in monetary terms and the value that is
placed on costs. Financial costs aim only to measure monetary values. Another important distinction is
1
, Course 4: Financial Management of Healthcare Organizations
between costs and resources. Resources are the inputs required for a production process; costs
measure the value of the resources.
Defining costs
Cost can be defined as the value of the resources used in the production of an item or service. From
this you can see that it is not only the money that changes hands when an items bought that is
regarded as costs: a number of different types of costs and ways of measuring can be identified:
- Historical cost: The amount of money paid for the resources used.
- Replacement cost: What it would costs in today‘s money to replace the resources that have been
used.
- Full cost: Both the costs directly associated with the production of the service and the costs that
would be incurred whether or not the activity was carried out.
- Managerial cost: The additional cost of producing one additional unit of a service.
- Purchase cost: What it would cost to pay an external organization to produce the service on your
behalf.
Reasons for measuring costs
There are three main reason for which accountants measure costs:
1. For stock and asset valuation for financial accounting purposes.
2. For decision-making purposes, enabling manager to reach informed decisions as whether to offer
a service, what prices to charge etc.
3. For control purposes so that budget can be constructed and activity can be monitored against
budgets.
- In health services the following are typical of decisions where there is a need for accurate,
relevant and timely information, like should a new consultant anaethesist be appointed?
Should de ward be closed? Should we run outpatient clinics from a different location?
This chapter focuses on accounting for decision making and control (2 & 3).
In health services, the main uses of reliable and accurate costs information include:
- Resource allocations: In developing a budget it is necessary to know the cost of its components;
if you understand the costs of services you can develop budgets and allocate resources to each
area of activity within the service.
- Comparison: You can compare costs between hospitals, etc. And develop performance
indicators such as costs per capita of hospital bed.
- Evaluation: Costs information is essential when you want to determine the best value for money.
- Monitoring and control: At institutional level, cost informant is the basis of assessing financial
performance.
- Pricing: Cost information is the basis of pricing.
How do costs behave?
2
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