Managerial Accounting and Cost Analysis
Managerial accounting asks two questions the exam returns to repeatedly: what does a unit of care actually cost, and how does cost behave when volume changes? Questions typically involve cost behavior, cost-finding methods, allocation, and short-run decisions.
Cost behavior and cost-volume-profit
Separate fixed, variable, mixed, and step costs within the relevant range. Contribution margin per unit equals net revenue per unit minus variable cost per unit. Break-even volume is fixed cost divided by contribution margin per unit; target volume adds desired profit to fixed cost before dividing. Step costs matter in healthcare because adding an operating room, a shift, or a nursing unit is not smoothly variable.
Cost-finding methods
The ratio of cost to charges divides a department's cost by its charges; it is fast but distorts when charges do not track resource use. Step-down allocation sequences support departments, giving each only one pass; the reciprocal method recognizes mutual services between support departments. Activity-based costing assigns cost by activity drivers, and time-driven ABC uses capacity cost rates and time equations.
Worked example
A registration and clinical support department costs $600,000 per year. It has 4 FTEs at 2,080 paid hours each, or 8,320 paid hours; practical capacity is 80%, or 6,656 productive hours. The capacity cost rate is 600,000 divided by 6,656 = $90.14 per hour. A patient visit consumes 12 minutes of registration (0.2 hours = $18.03) and 24 minutes of clinical staff time (0.4 hours = $36.06), so staff cost is $54.09 per visit before supplies. Because the rate is built on capacity, unused capacity is reported separately instead of being spread across visits.
Decision rules
Relevant costs are future costs that differ between alternatives. Allocated fixed overhead is usually irrelevant to keep-or-drop, make-or-buy, and special-order pricing decisions, which turn on contribution margin and available capacity.
Traps that cost marks
- Using charges as a proxy for cost.
- Allocating fixed overhead to a service and concluding it is unprofitable.
- Ignoring step costs when a proposal adds a shift or a unit.
- Double-counting costs in the step-down method.