CSAF Exam Questions with Verified Correct
Answers
Why is Cost Accounting Important?
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
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
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)
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
BE= Fixed Cost/ Contribution margin per unit
Break-Even Point Calculation Example
,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
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
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
Differential costing ignores the overhead costs and only looks at incremental costs that are
directly related to the product.
Decision-Making Example
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
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
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)
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
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
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
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)
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
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
Answers
Why is Cost Accounting Important?
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
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
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)
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
BE= Fixed Cost/ Contribution margin per unit
Break-Even Point Calculation Example
,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
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
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
Differential costing ignores the overhead costs and only looks at incremental costs that are
directly related to the product.
Decision-Making Example
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
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
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)
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
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
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
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)
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
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
