Finance for Healthcare

With this project the students have ample opportunity to be creative In their solution approaches. It Is Impossible to provide a single solution to apply to every student’s work. The information below provides the basic concepts for the questions instructed to be included in the paper.

These answers are merely a starting point; the student’s work should be graded on thought processes, critical thinking skills, assumptions used, creativity, and the ability to express ideas coherently from the resulting numerical answers on the spreadsheet. 4. Your paper should include: a. Explain why allocation methods are used.Inherently, in all businesses there is overhead costs or non-direct costs.

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If management wants to know the true cost of direct patient care, it is essential that the non-dialect costs or overhead be allocated to direct care department In a precise and logical manner. In Dalton to knowing the true cost of direct service department, management needs to know the true expense of all indirect functions involved with an individual department. In this way, management will know if direct care departments are generating enough revenue to cover the true cost of providing care in that department. B.Briefly describe the differences In the three allocation methods discussed In the case. (Hint: Don’t discuss the mathematics of the schemes, but rather how they differ conceptually.

) The four methods differ in how intra-support department allocations are handled and, consequently, in complexity. The direct method assumes that support departments provide services only to patient services departments. Thus, no intra-support department services are recognized, even though such services exist. This simplifying assumption makes the direct method the easiest to apply but the weakest conceptually.The step-down method recognizes some Intra-support department services, but It does so in a relatively simplistic way. In this method, the support department that provides the most services to the other support departments is allocated first (to support and patient services departments). Then the department is closed, and the process steps down to the support department that provides the next highest amount of services to other support departments.

Because support departments are closed out In each step, there Is no opportunity to allocate support costs back to the departments that have already closed.Thus, this teeth is not as complex as the remaining two to implement in practice, but it is superior conceptually to the direct method. The double apportionment method flirt allocates each support department to all other departments, so each support department receives an allocation from all other support departments.

After the initial allocation (the first apportionment), the step-down method is used to allocate the costs that remain In the support departments after the first apportionment, support departments. This method better recognizes intra-support department relationships than do the first two, but it adds complexity .Which allocation method is best? Conceptually, double apportionment method is the best of the three methods used, followed by the step-down method and, finally, the direct method. Although the direct method is conceptually the weakest, it is the easiest and least costly to implement.

As in most situations, greater accuracy comes at a cost?the greater the accuracy of the allocation method, the greater the implementation cost (and the more difficult it is to explain to department heads and other interested parties). D. What are the allocations to each patient services department, and resulting reparability, for each allocation method?Look at the Profit and Loss Statements on the spread sheet e. What does the analysis indicate about profitability of each patient services department with or without allocation? Over a wide range of assumptions regarding the relative sizes of the cost pools and the allocation rates, we find that Medical Services and Obstetrics are profitable, while Emergency Services is not. Thus, the inherent operations of Emergency Services must be examined to see if Maple Street Hospital management can take any actions to improve this department’s profitability.However, at least under the revenue and cost framework used in the managerial accounting system, Pediatrics probably is inherently unprofitable. This does not necessarily mean department closure should be considered. The department may be vital to the hospital’s mission, therefore may be willing to subsidize the losses with profits from the other department.

The true economic contribution of Emergency Services to the organization may not be adequately measured. For example, Emergency Services may be instrumental in creating patient demand for Obstetrics ND Medical Services.If Emergency Services were closed and patient demand fell significantly, the loss in aggregate profit from falling volume could exceed the losses realized by Emergency Services. If this is the case, Emergency Services is financially justifiable in spite of the losses it shows on the managerial accounting profit and loss statements. F. What is your recommendation regarding the appropriate cost allocation method for the practice? Without more information about the current cost accounting system, it is impossible to make an informed decision.The double apportionment method should be considered the preferred method. If this is not feasible, the step-down method could be implemented without losing over 5 percent of the accuracy.

Even the direct method introduces only a 6. 5 percent inaccuracy. Another consideration is any third-party payer requirements. For example, hospitals are required to use the step-down method for Medicare cost reporting, which drives most hospitals to use that method in their managerial accounting systems.

Similar requirements for group practices, if they exist, could influence the final decision.