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    Role of Cost in Decision Making in Healthcare Industry

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    Course material: Neumann, B. R., Clement, J. P., and Cooper, J. C. Financial Management: Concepts and Applications for Health Care Organizations. Dubuque, IA: Kendall/Hunt Publishing Company, 1999, 239.

    1. Where would you most likely find each of the following expenses listed: Administration, Physical Therapy, Nursing, or Maintenance?

    a. The Administrator's salary

    b. Pharmacy supplies

    c. Crutches

    d. Fuel

    e. Clerical office help

    f. Office supplies

    g. Physical therapy salaries

    h. The salary for the Director of Nursing

    i. RN wages

    j. Snowplowing expenses

    k. Staff education on how to use crutches with a patient

    l. Health insurance for the clerical staff in the physical therapy department.

    2. Identify each of the following as either direct costs or indirect costs?

    a. Real estate taxes

    b. Clinic telephone expense

    c. Oil for the heat for the whole facility

    d. Emergency room medical supplies

    e. Liability insurance

    f. Nursing wages for the operating room

    g. Food for the residents in the medical surgical unit

    h. Diapers for the babies in the nursery

    i. Computer system for the facility

    j. Marketing expense for the new wing

    3. What is the contribution margin in the following example?

    a. Revenues: $1,200,000

    b. Variable Costs: $ 215,000

    c. Fixed Costs: $1,000,000

    What is the contribution margin percentage?

    4. Explain, in your own words, the relative advantages and disadvantages of each of the three primary cost allocation methods (Direct Allocation, Step-Down Allocation, and Reciprocal Allocation).

    5. Using the following example, allocate service center costs to each of the three revenue centers using the step-down method:
    Full-time Costs Square Feet Meals Employees
    Service Centers
    Maintenance $150,000 ---- 2,500 10
    Dietary 400,000 10,000 ---- 15 Administrative 600,000 20,000 2,500 10
    Revenue Centers
    Laboratory 600,000 30,000 2,500 20
    Radiology 800,000 40,000 2,500 30
    Nursing 2,000,000 100,000 30,000 50
    $4,550,000 200,000 40,000 135

    6. List three examples of Relative Value Units (RVUs) common to health care.

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    Unit 3 Written Assignment:

    1. Where would you most likely find each of the following expenses listed: Administration, Physical Therapy, Nursing, or Maintenance?

    a. The Administrator's salary - Administration

    b. Pharmacy supplies -pharmacy therapy

    c. Crutches -nursing

    d. Fuel -maintenance

    e. Clerical office help -administration

    f. Office supplies -maintenance

    g. Physical therapy salaries -physical therapy

    h. The salary for the Director of Nursing -administration

    i. RN wages - administration

    j. Snowplowing expenses -maintenance

    k. Staff education on how to use crutches with a patient -administration

    l. Health insurance for the clerical staff in the physical therapy department. -physical therapy

    2. Identify each of the following as either direct costs or indirect costs?

    a. Real estate taxes -indirect costs

    b. Clinic telephone expense -indirect costs

    c. Oil for the heat for the whole facility -indirect costs

    d. Emergency room medical supplies -indirect costs

    e. Liability insurance -indirect costs

    f. Nursing wages for the operating room -direct costs

    g. Food for the residents in the medical surgical unit -direct costs

    h. Diapers for the babies in the nursery -indirect costs

    i. Computer system for the facility -indirect costs

    j. Marketing expense for the new wing -direct costs

    3. What is the ...

    Solution Summary

    The solution discusses the role of cost in decision making in healthcare industry.

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