Cost accounting Example

Essays on Cost accounting Assignment Cost Accounting COMPUTATION OF THE TREATMENT COST FOR HD AND PD USING AGGREGATE COSTING MODEL In the given scenario, the total cost associated bythe Dialysis Clinic, Inc. in the clinical practice based on hemodialysis (HD)and Peritoneal Dialysis (PD) includes fixed and variable costs. The fixed cost is related to the labor/nurse services, durable equipments expenses and general overhead expenses. Whereas, the variable cost in the treatment includes cost of providing services i.e. standard suppliers and episode suppliers. Given, The overall fixed cost associated with both the treatment is AED 883,280. Number of patients treated during the time span 164 (i.e. 102 hemodialysis and 62 peritoneal dialysis) Overall fixed cost associated with the HD treatment = (Overall fixed cost associated with both the treatment/ Number of patients treated) * Number of HD patients treated = (1806151 /164)* 102 = AED 1,123,334 (approximately) Overall fixed cost associated with the PD treatment = (Overall fixed cost associated with both the treatment/ Number of patients treated) * Number of PD patients treated = (1806151/164)* 62 = AED 682,813 (approximately) A. Ratio-of-cost-per-patient for HD patients = Aggregate total costs associated with the treatment / No. of patient receive the treatment = AED (512,619 + 98680 + 1,123,334) / 102 = 17,006:1 This signifies that cost per HD patients AED 17,006. Ratio-of-cost-per-patient for PD patients = Aggregate total costs associated with the treatment / No. of patient receive the treatment = AED (152,281 + 212,015 + 682,813) / 62 = 16,889:1 This signifies that cost per PD patients AED 16,889. B. Ratio-of-cost-per-treatment for HD patients = Aggregate total costs associated with the treatment / No. of treatment provided No. of treatment provided 14,343 = AED (512,619 + 98680 + 1,123,334) / 14,343 = AED 121 (approx) Ratio-of-cost-per-treatment for PD patients = Aggregate total costs associated with the treatment / No. of treatment provided No. of treatment provided 20,624. = AED (152,281 + 212,015 + 682,813) /20,624 = AED 51 (approx) C. Ratio-of-cost-to-charge for HD patients = Revenue earn from the treatment / Total cost incurred in the treatment = 1,860,287 / (512,619 + 98680 + 1,123,334) = 1,860,287 / 1,734,633 = 1.07: 1 This implies that Dialysis Clinic, Inc. earns AED 1.07 by incurring AED 1 in the HD clinical practices to the patients. Ratio-of-cost-to-charge for PD patients = Revenue earn from the treatment / Total cost incurred in the treatment = 1,146,488 / (152,281 + 212,015 + 682,813) = 1,146,488 / 1,047,109 = 1.09: 1 This implies that Dialysis Clinic, Inc. earns AED 1.09 by incurring AED 1 in the PD clinical practices to the patients. 2. COMPUTATION OF THE TREATMENT COST FOR HD AND PD BASED ON PHASE 1 General overhead cost in the treatment cost HD = (Total general overheads expense of organization / Total number of treatment) * No. of HD treatments = (785,825 / 34,967) * 14,343 = AED 322,334 General overhead cost in the treatment cost PD = (Total general overheads expense of organization / Total number of treatment) * No. of PD treatments = (785,825 / 34,967) * 20,624 = AED 463,490 Overall expenses and cost in the treatment cost HD = (Total cost including general overheads expense of organization / Total number of treatment) * No. of HD treatments = {(1,029,837 + 322,334) /34,967} * 14,343 = AED 554,643 Overall expenses and cost in the treatment cost PD = (Total cost including general overheads expense of organization / Total number of treatment) * No. of HD treatments = {(966,084 + 463,490) /34,967} * 20,624 = AED 843,182 3. COMPUTATION OF THE TREATMENT COST FOR HD AND PD BASED ON PHASE 2 Labor/nursing services cost in the treatment cost HD = (Total Labor/nursing services expense of organization / No. of patients treated) * No. of patient treated with HD = (883,280 / 164) * 102 = AED 549,357 Labor/nursing services cost in the treatment cost PD = (Total Labor/nursing services expense of organization / No. of patients treated) * No. of patient treated with HD = (883,280 / 164) * 62 = AED 333,923 Total Dialysis Clinic, Inc. Cost in HD treatment = Total traceable expenses in HD treatment + General overhead expense in HD treatment + Labor/nursing services cost in the treatment cost HD = 731,899 + 322,334 + 549,357 = AED 1,603,590 Total Dialysis Clinic, Inc. Cost in PD treatment = Total traceable expenses in PD treatment + General overhead expense in PD treatment + Labor/nursing services cost in the treatment cost PD = 380,742 + 463,490+ 333,923 = AED 1,178,155 4. STRENGTH AND WEAKNESS OF THE ALTERNATIVE COST MODEL In the context of changing scenario and advancement in the technological aspects leads to allocation of cost amongst the various operational activities. This will ultimately led to the complexity in the overall process for proper cost computing. In order to reduce the complexity organizations implement the Activity Based Cost (ABC) method or alternative costing models to have a better understanding and compute the true cost associated with their operations and proper decision making (Finkler and Ward, 192-196). It is observed that costing is based on aggregate cost and simple average cost per patient or treatment. The two aggregate costing methods includes Ratio-of-cost-per-patient (RCP) and Ratio-of-cost-per-treatment (RCT), which computes cost analysis, through assuming every cost of organization as a single pool of indirect cost that were equally assigned to patients treatment in hospital during the stipulated period of time (Finkler and Ward, 192-196). The major strength in RCP costing method is that healthcare can easily track down per patient cost that they need to bear in HD or PD treatment. This will correspondingly help to guide the patients regarding the overall cost after or before the intervention process. Furthermore, the costing technique enables organization to compute revenue they earned on per patient basis. Moreover, the key weakness of the approach is that all the patients that undergo either HD or PD treatment may not face or incur similar treatment process as others. Therefore, in this respect the cost will vary accordingly. Moreover, it is to be noted that indirect cost affects the appropriateness of the costing technique. Additionally, costing based on RCT have a major advantage wherein organization is able to drive the cost that is associated with different treatment intervention separately like x-ray, laboratory test and physical examination. On the other hand, the major drawback or weakness in this method is that organization cannot measure profitability from different treatment aspects as it leads to further complexity with having numerous treatment processes .Finally, it can be ascertained that ratio-of-cost-to-change method helps the organization to step-down all its indirect costs, which in turns assists to measure the revenue generated from each of their subsequent department in respect of the cost incurred (Finkler and Ward, 192-196). Correspondingly, method also enables to estimate the cost of individual treatment/procedure performance within the department. Furthermore, this method helps in proper decision making to pursue high reimbursement cost incurred in the treatment types rather than focusing on effective cost utilization. Besides, of the significant advantage the key weakness of this method is that it reflects all the individual treatment units to be profitable, even though the units are incurring loss by covering the losses with the profits earned by other units This in turn will not depict the true and fair picture of the organization (Finkler and Ward, 192-196). Thus, it can be concluded that all the approach of costing will help managers to take effective decision and implement proper treatment strategy and services in terms of proper financial planning in an effective manner. Work Cited Finkler, Steven A. and David Marc Ward. Cost Accounting for Health Care Organizations: Concepts and Applications. United States: Jones Bartlett Learning, 1999. Print.