CSAF QUESTIONS WITH VERIFIED ANSWERS
Why is Cost Accounting Important? - Answers - Because reimbursement is
predetermined, management must focus primarily on finding way to manage costs, so
cost accounting is critical. Cost information is useful to a variety of key decision-makers
in a healthcare organization.
Incremental or Marginal Cost - Answers - This is when costing decisions are being
made with the understanding that there is a difference in cost at two different activity or
volume levels.
Contribution Margin - Answers - This is the difference between marginal revenue and
marginal cost. The contribution margin equals the revenue received for one unit of
service less the marginal expenses incurred for one unit of service. The contribution
margin is the amount of revenues remaining after meeting marginal costs; this
remaining margin goes toward supporting fixed costs. Whatever is left goes to profit.
Break-Even Point (BEP) - Answers - Break-even point is the level of sales volume of a
certain product (or service) producing the exact amount of contribution margin needed
to cover fixed costs.
Break-Even Equation - Answers - BE= Fixed Cost/ Contribution margin per unit
Break-Even Point Calculation Example - Answers - Revenue: $100,000. Volume:
10,000. Revenue per Unit: $10.
Less: Variable Cost: $50,000. Volume: 10,000. Variable Cost per Unit: $5.
Contribution Margin: $50,000. Volume: 10,000. Contribution Margin per Unit: $5.
Less: Fixed Cost: $40,000. Volume: 10,000. Fixed Cost per Unit: $4.
Net Profit: $10,000. Volume: 10,000. Net Profit per Unit: $1.
Break-Even Point Calculation per Volumes of Unit Example - Answers - Revenue:
$100,000. Volume: 10,000. Revenue per Unit: $10.
Less: Variable Cost: $50,000. Volume: 10,000. Variable Cost per Unit: $5.
Contribution Margin: $50,000. Volume: 10,000. Contribution Margin per Unit: $5.
Less: Fixed Cost: $40,000. Volume: 10,000. Fixed Cost per Unit: $4.
Net Profit: $10,000. Volume: 10,000. Net Profit per Unit: $1.
BEP = $40,000 (total fixed costs) / $5 (contribution margin per unit)
BEP = 8,000 units.
Full Absorption Costing - Answers - Full absorption costing attempts to allocate all
overhead costs to all activities supported by those costs. Overhead, or indirect costs,
are allocated down to the revenue-producing activities based on an objective
methodology.
,Differential Costing - Answers - Differential costing ignores the overhead costs and only
looks at incremental costs that are directly related to the product.
Decision-Making Example - Answers - The decision to use full absorption costing or
differential cost is made based on how the information will be used. For example, when
management is assessing the profitability of all hospital programs relative to one
another, then it may be appropriate to consider departmental costs on a full absorption
basis. This may be an effective way to identify marginally performing departments for
further action.
If, however, the analysis was conducted to price a contract that would bring incremental
volume, but would require no additional investment of equipment or indirect labor, then
it would be appropriate to consider only marginal direct (differential) costs.
Direct Costs - Answers - These may be fixed or variable, but they are clearly and
directly associated with the activity that is being costed. Direct costs include direct
salaries and supplies.
Indirect Costs - Answers - These may be fixed or variable, but they are NOT clearly nor
directly associated with the activity being costed. Overhead is a common term for
indirect costs. These costs are assigned to a service using some acceptable allocation
method. An example would include administration provided in a hospital setting.
Activity-Based Costing (ABC) - Answers - A method of determining product costs using
cost drivers or activity measures that cause indirect costs to be incurred. Ideal cost
drivers are activities that pertain to each procedure in varying amounts. ABC provides
an overview of developing and analyzing cost information by service line.
Activity-based costing is generally considered a more accurate costing method than the
proportionate allocation method. It is, however, often more expensive to determine due
to the necessary data collection. ABC provides the foundation for clinical improvement
efforts by a more accurate identification of payment risk.
Activity-Based Costing (ABC) Example - Answers - An example of ABC would be using
the level of a specific equipment use to determine the allocation of depreciation and
repair expense.
Activity-Based and Service-Line Costing (ABC) Example - Answers - For example, the
resources consumed by a cardiac patient in an imaging department are considerably
more than the resources consumed by a patient with pneumonia.
Activity-Based and Service-Line Costing - Answers - Healthcare organizations have
developed service lines based on major diagnostic categories (for example, diseases of
the digestive system or obstetric procedures).
The advantage of analyzing results by diagnostic category is that it develops an
estimate of total resources consumed, including resources consumed in shared
departments.
, Service-Line Costing (Profitability Analysis) - Answers - There are several objectives of
analyzing profitability according to service lines.
Shift financial analysis toward the major lines.
Determine the advantages or disadvantages of being in that product line.
Emphasize or de-emphasize certain services.
Determine data for use in benchmarking among clinical specialties.
Service-line costing can also be useful in assessing the profitability of a proposed
managed care contract and in developing carve-out rates for specific types of cases (for
example, open-heart surgeries and bone marrow transplants).
Responsibility Accounting - Answers - The assignment or allocation of cost to the
individual manager who is primarily responsible for making decisions about those costs.
Once the primary responsibility for incurring a specific cost has been established,
various management reports, such as departmental expense reports, can be developed
to assess a manager's effectiveness.
Responsibility Accounting Example - Answers - The budget manager has provided you
with your monthly responsibility report and has asked you to do the following:
Analyze the unfavorable (-) variances in wage expense and medical supplies.
Explain the reasons for these material variances between actual and budget.
Introduction to Standard Costing Systems - Answers - There are two principal uses for
cost accounting: assist with price negotiations and identify opportunities to enhance
financial performance. Cost accounting is used for management decision-making. The
better the cost information, the better the decision-making. One of the best methods of
developing cost information is to implement a standard costing system.
Standard Costs... - Answers - ...are those costs that should be incurred to produce a
product. There are three main types of standards:
-Predetermined or Synthetic Standard
-Negotiated or Historical Standard
-Customized or Engineered Standard
Predetermined or Synthetic Standard - Answers - Arrived at by a group or association of
organizations with similar characteristics (for example, a published relative value scale).
PROS:
-Minimal development time and cost.
-Ease of development and implementation.
-Not based on specific items and not specific to an individual facility.
CONS:
-Not customized, thus less precise.
-Not well accepted.
-May not be applicable directly to an individual department within a specific facility.
Negotiated or Historical Standard - Answers - Based on the historical data of the
specific institution for which the budget is intended.
Why is Cost Accounting Important? - Answers - Because reimbursement is
predetermined, management must focus primarily on finding way to manage costs, so
cost accounting is critical. Cost information is useful to a variety of key decision-makers
in a healthcare organization.
Incremental or Marginal Cost - Answers - This is when costing decisions are being
made with the understanding that there is a difference in cost at two different activity or
volume levels.
Contribution Margin - Answers - This is the difference between marginal revenue and
marginal cost. The contribution margin equals the revenue received for one unit of
service less the marginal expenses incurred for one unit of service. The contribution
margin is the amount of revenues remaining after meeting marginal costs; this
remaining margin goes toward supporting fixed costs. Whatever is left goes to profit.
Break-Even Point (BEP) - Answers - Break-even point is the level of sales volume of a
certain product (or service) producing the exact amount of contribution margin needed
to cover fixed costs.
Break-Even Equation - Answers - BE= Fixed Cost/ Contribution margin per unit
Break-Even Point Calculation Example - Answers - Revenue: $100,000. Volume:
10,000. Revenue per Unit: $10.
Less: Variable Cost: $50,000. Volume: 10,000. Variable Cost per Unit: $5.
Contribution Margin: $50,000. Volume: 10,000. Contribution Margin per Unit: $5.
Less: Fixed Cost: $40,000. Volume: 10,000. Fixed Cost per Unit: $4.
Net Profit: $10,000. Volume: 10,000. Net Profit per Unit: $1.
Break-Even Point Calculation per Volumes of Unit Example - Answers - Revenue:
$100,000. Volume: 10,000. Revenue per Unit: $10.
Less: Variable Cost: $50,000. Volume: 10,000. Variable Cost per Unit: $5.
Contribution Margin: $50,000. Volume: 10,000. Contribution Margin per Unit: $5.
Less: Fixed Cost: $40,000. Volume: 10,000. Fixed Cost per Unit: $4.
Net Profit: $10,000. Volume: 10,000. Net Profit per Unit: $1.
BEP = $40,000 (total fixed costs) / $5 (contribution margin per unit)
BEP = 8,000 units.
Full Absorption Costing - Answers - Full absorption costing attempts to allocate all
overhead costs to all activities supported by those costs. Overhead, or indirect costs,
are allocated down to the revenue-producing activities based on an objective
methodology.
,Differential Costing - Answers - Differential costing ignores the overhead costs and only
looks at incremental costs that are directly related to the product.
Decision-Making Example - Answers - The decision to use full absorption costing or
differential cost is made based on how the information will be used. For example, when
management is assessing the profitability of all hospital programs relative to one
another, then it may be appropriate to consider departmental costs on a full absorption
basis. This may be an effective way to identify marginally performing departments for
further action.
If, however, the analysis was conducted to price a contract that would bring incremental
volume, but would require no additional investment of equipment or indirect labor, then
it would be appropriate to consider only marginal direct (differential) costs.
Direct Costs - Answers - These may be fixed or variable, but they are clearly and
directly associated with the activity that is being costed. Direct costs include direct
salaries and supplies.
Indirect Costs - Answers - These may be fixed or variable, but they are NOT clearly nor
directly associated with the activity being costed. Overhead is a common term for
indirect costs. These costs are assigned to a service using some acceptable allocation
method. An example would include administration provided in a hospital setting.
Activity-Based Costing (ABC) - Answers - A method of determining product costs using
cost drivers or activity measures that cause indirect costs to be incurred. Ideal cost
drivers are activities that pertain to each procedure in varying amounts. ABC provides
an overview of developing and analyzing cost information by service line.
Activity-based costing is generally considered a more accurate costing method than the
proportionate allocation method. It is, however, often more expensive to determine due
to the necessary data collection. ABC provides the foundation for clinical improvement
efforts by a more accurate identification of payment risk.
Activity-Based Costing (ABC) Example - Answers - An example of ABC would be using
the level of a specific equipment use to determine the allocation of depreciation and
repair expense.
Activity-Based and Service-Line Costing (ABC) Example - Answers - For example, the
resources consumed by a cardiac patient in an imaging department are considerably
more than the resources consumed by a patient with pneumonia.
Activity-Based and Service-Line Costing - Answers - Healthcare organizations have
developed service lines based on major diagnostic categories (for example, diseases of
the digestive system or obstetric procedures).
The advantage of analyzing results by diagnostic category is that it develops an
estimate of total resources consumed, including resources consumed in shared
departments.
, Service-Line Costing (Profitability Analysis) - Answers - There are several objectives of
analyzing profitability according to service lines.
Shift financial analysis toward the major lines.
Determine the advantages or disadvantages of being in that product line.
Emphasize or de-emphasize certain services.
Determine data for use in benchmarking among clinical specialties.
Service-line costing can also be useful in assessing the profitability of a proposed
managed care contract and in developing carve-out rates for specific types of cases (for
example, open-heart surgeries and bone marrow transplants).
Responsibility Accounting - Answers - The assignment or allocation of cost to the
individual manager who is primarily responsible for making decisions about those costs.
Once the primary responsibility for incurring a specific cost has been established,
various management reports, such as departmental expense reports, can be developed
to assess a manager's effectiveness.
Responsibility Accounting Example - Answers - The budget manager has provided you
with your monthly responsibility report and has asked you to do the following:
Analyze the unfavorable (-) variances in wage expense and medical supplies.
Explain the reasons for these material variances between actual and budget.
Introduction to Standard Costing Systems - Answers - There are two principal uses for
cost accounting: assist with price negotiations and identify opportunities to enhance
financial performance. Cost accounting is used for management decision-making. The
better the cost information, the better the decision-making. One of the best methods of
developing cost information is to implement a standard costing system.
Standard Costs... - Answers - ...are those costs that should be incurred to produce a
product. There are three main types of standards:
-Predetermined or Synthetic Standard
-Negotiated or Historical Standard
-Customized or Engineered Standard
Predetermined or Synthetic Standard - Answers - Arrived at by a group or association of
organizations with similar characteristics (for example, a published relative value scale).
PROS:
-Minimal development time and cost.
-Ease of development and implementation.
-Not based on specific items and not specific to an individual facility.
CONS:
-Not customized, thus less precise.
-Not well accepted.
-May not be applicable directly to an individual department within a specific facility.
Negotiated or Historical Standard - Answers - Based on the historical data of the
specific institution for which the budget is intended.
