Cost Accounting - Jones & Bartlett Learning

1 2/7/07 2:28 PM Page i Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. Essentials of cost Accounting for HEALTH CARE ORGANIZATIONS. Third Edition STEVEN A. FINKLER, PhD, CPA. Program in Health Policy and Management Robert F. Wagner Graduate School of Public Service New York University New York, New York DAVID M. WARD, PhD. College of Health Professions University of New England Biddeford, Maine JUDITH J. BAKER, PhD, CPA. The Resource Group Dallas, Texas 2/7/07 2:28 PM Page ii Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. World Headquarters Jones and Bartlett Publishers Jones and Bartlett Publishers Jones and Bartlett Publishers 40 Tall Pine Drive Canada International Sudbury, MA 01776 6339 Ormindale Way Barb House, Barb Mews 978-443-5000 Mississauga, Ontario L5V 1J2 London W6 7PA. CANADA UK. Jones and Bartlett 's books and products are available through most bookstores and online booksellers. To contact Jones and Bartlett Publishers directly, call 800-832-0034, fax 978-443-8000, or visit our website, Substantial discounts on bulk quantities of Jones and Bartlett 's publications are available to corporations, professional associations, and other qualified organizations.

2 For details and specific discount information, contact the special sales department at Jones and Bartlett via the above contact information or send an email to Copyright 2007 by Jones and Bartlett Publishers, Inc. All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the copyright owner. This publication is designed to provide accurate and authoritative information in regard to the Subject Matter cov- ered. It is sold with the understanding that the publisher is not engaged in rendering legal, Accounting , or other pro- fessional service. If legal advice or other expert assistance is required, the service of a competent professional person should be sought. Library of Congress Cataloging-in-Publication Data Finkler, Steven A.

3 Essentials of cost Accounting for health care organizations / Steven A. Finkler, David M. Ward, Judith J. Baker. 3rd ed. p. ; cm. Includes bibliographical references and index. ISBN-13: 978-0-7637-3813-6. ISBN-10: 0-7637-3813-1. 1. Health facilities Costs Accounting . 2. Hospitals cost of operation Accounting . 3. cost Accounting . I. Ward, David M. (David Marc), 1964- II. Baker, Judith J. III. Title. [DNLM: 1. Costs and cost Analysis. 2. Health Facilities economics. 3. Accounting methods. 4. Econom- ics, Hospital. WX 157 F499e 2007]. 2007. 657'.8322042 dc22. 2006028724. 6048. Production Credits Publisher: Michael Brown Production Director: Amy Rose Associate Editor: Katey Birtcher Production Assistant: Amy Browning Marketing Manager: Sophie Fleck Manufacturing Buyer: Therese Connell Composition: Northeast Compositors, Inc. Cover Design: Timothy Dziewit Cover/Title Page Image: Leah Groisberg/Shutterstock, Inc. Printing and Binding: Malloy, Inc.

4 Cover Printing: Malloy, Inc. Printed in the United States of America 11 10 09 08 07 10 9 8 7 6 5 4 3 2 1. 2/7/07 2:28 PM Page iii Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. Dedication To Lilli, Joanne, and (the Bear). 2/7/07 2:28 PM Page iv Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. 2/7/07 2:28 PM Page v Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. Contents Preface ..xiii About the Authors ..xvii PART I cost Accounting FOUNDATIONS ..1. CHAPTER 1 Introduction to cost Accounting ..3. The Purpose of cost Accounting ..4. Costs for Reporting vs. Costs for Management Planning and Control ..7. Good cost Accounting Systems ..8. The Human Element in cost Accounting ..9. Suggested Reading ..10. Exercises ..10. CHAPTER 2 cost Definitions ..13. Definition and Characteristics of Costs ..15. Cross-Subsidization of Costs ..19. True cost , Economic cost , and Accounting cost ..21. The Long Term vs.

5 The Short Term ..24. Departmental vs. Product-Line Costing ..26. External Costs ..30. Notes ..31. Suggested Reading ..31. Exercises ..31. Problems ..31. CHAPTER 3 Product Costing ..33. The Need for Product Costing ..34. Job-Order and Process Costing ..34. Process Costing ..36. Job-Order Costing ..37. v 2/7/07 2:28 PM Page vi Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. vi CONTENTS. Hybrid Approaches to Product Costing ..40. Standard Costing Systems ..41. Microcosting ..46. Product Costing and Computers ..46. Notes ..47. Suggested Reading ..47. Exercises ..47. Problems ..48. CHAPTER 4 cost Allocation ..49. What Is cost Allocation? ..51. Determining Overhead Application Rates ..52. cost Allocation and Motivation ..59. Allocating Joint Costs ..63. Traditional cost Allocation for Health Care Organizations ..66. Is Good-Enough cost Finding Good Enough? ..76. Notes ..79. Suggested Reading ..79. Exercises ..79. Problems.

6 80. CHAPTER 5 Costing for Nonroutine Decisions ..83. cost Information for Nonroutine Decisions ..84. Sunk Costs Are Irrelevant ..85. The Role of Volume ..86. Terminology for Relevant Costing ..88. Examples of Nonroutine Decisions ..88. cost -Benefit and cost -Effectiveness Analysis ..92. Notes ..94. Suggested Reading ..94. Exercises ..94. Problems ..95. CHAPTER 6 cost -Volume-Profit Analysis ..97. The cost -Volume-Profit Relationship ..98. Breakeven Analysis ..100. Caveats ..107. Mixed Costs and Step-Fixed Costs ..111. Using Breakeven Analysis for Decision Making ..112. Suggested Reading ..113. Exercises ..113. Problems ..114. 2/7/07 2:28 PM Page vii Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. CONTENTS vii PART II cost Accounting INFORMATION FOR. PLANNING AND CONTROL ..117. CHAPTER 7 Predicting Future Costs ..119. Using Groups for Estimating Costs ..121. Indexing for Inflation ..122. cost Estimation Using Linear Regression.

7 125. Forecasting ..136. Learning Curves ..150. Suggested Reading ..155. Exercises ..155. Problems ..156. Case Study Part 1 ..157. CHAPTER 8 Budgeting ..159. The Role of Budgeting ..160. Budgeting Philosophy ..162. The Master Budget ..163. The Long-Range Budget ..164. The Operating Budget ..165. The Cash Budget ..167. Program Budgets ..175. The Capital Budget ..175. Special-Purpose Budgets ..187. The Negotiation and Approval Process ..187. Flexible Budgets ..188. Note ..188. Suggested Reading ..188. Exercises ..189. Problems ..189. Case Study Part 2 ..191. Appendix 8 A: Present Value and Compound Interest Tables ..193. CHAPTER 9 Flexible Budgeting and Variance Analysis ..199. Traditional Variance Analysis ..201. Flexible Budget Variance Analysis ..203. Calculation of Variances ..210. Variance Analysis and Management Control ..214. Revenue Variances ..218. Notes ..225. Suggested Reading ..225. 2/7/07 2:28 PM Page viii Jones and Bartlett Publishers.

8 NOT FOR SALE OR DISTRIBUTION. viii CONTENTS. Exercises ..225. Problems ..226. Case Study Part 3 ..227. CHAPTER 10 Management Control ..229. Is Management Control a Science? ..230. Responsibility Centers for Management Control ..231. The Management Control Process ..233. Key Variables ..235. Internal Control Systems ..237. Transfer Pricing ..242. Management Control of Projects ..242. Notes ..250. Suggested Reading ..250. Exercises ..251. Problem ..251. PART III ADDITIONAL cost Accounting TOOLS TO. AID IN DECISION MAKING ..253. CHAPTER 11 cost Accounting Ratios ..255. Financial Ratios ..256. Development of a New Set of Ratios ..257. Some cost Accounting Ratios ..258. Comparisons ..260. Notes ..262. Suggested Reading ..262. Exercises ..262. Problems ..263. CHAPTER 12 Measuring Productivity ..265. Productivity Defined ..266. The Traditional Approach to Measuring Productivity ..266. The Total Productivity Ratio ..267. The Partial Productivity Ratio.

9 268. Productivity and Indirect Costs ..270. Managing Discretionary Costs ..273. Notes ..280. Suggested Reading ..280. Exercises ..281. Problems ..281. 2/7/07 2:28 PM Page ix Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. CONTENTS ix CHAPTER 13 Inventory ..283. Inventory Costing ..284. Minimization of Inventory Costs ..291. Inventory Issues Related to Health Care Manufacturing ..303. Notes ..303. Suggested Reading ..303. Exercises ..303. Problems ..304. CHAPTER 14 Dealing with Uncertainty ..305. Uncertainty ..306. The Expected Value Technique ..306. Simulation Analysis ..313. Network cost Budgeting ..319. Linear Programming ..326. Notes ..331. Suggested Reading ..331. Exercises ..332. Problems ..332. CHAPTER 15 Information Systems for Costing ..335. Considerations in Designing Costing Systems ..336. The Risks of Do-It-Yourself Computing ..338. Suggested Reading ..342. Exercises ..343. CHAPTER 16 Performance Evaluation and Incentive Compensation.

10 345. Responsibility Centers ..346. Evaluating Investment Centers and Their Managers ..349. Creating Compensation Incentives ..353. Notes ..358. Suggested Reading ..358. Exercises ..358. Problem ..359. PART IV cost Accounting FOR THE FUTURE ..361. CHAPTER 17 New Approaches to cost Accounting ..363. Is There a Problem with Traditional cost Accounting ? ..364. Kaplan's Four-Stage cost Model ..365. An Alternative: New Generally Accepted Accounting Principles for One Unified System ..367. 2/7/07 2:28 PM Page x Jones and Bartlett Publishers. NOT FOR SALE OR DISTRIBUTION. x CONTENTS. The Japanese Alternative ..369. Dashboards ..370. Balanced Scorecards ..371. Notes ..372. Suggested Reading ..373. Exercises ..373. CHAPTER 18 Activity-Based Costing ..375. What is ABC? ..376. Why Use ABC? ..378. Two Approaches to ABC ..378. Tracing vs. Allocating in ABC ..378. ABC Allocation Principles ..379. What Should Be Allocated in ABC? ..380. An ABC Example in the Pharmacy.