Response 1
Respond to your classmate, saying whether you agree with their assertion about which method of classifying costs would be most effective and why you agree or disagree.
Financial managers are able to utilize an organizations financial data, such as assets or liabilities, to create ratios to compare a current period to the next. By doing so, a financial manager can recognize if a company is improving or lacking financially. Additionally, managers can implement changes if needed in order to improve financial standing for the future (Nowicki, 2022).
Cost accounting is a critical aspect of financial manager’s work. The process of cost accounting includes analyzing costs, such as utilizing specific procedures for categorizing costs and determining costs for products. By having an understanding of costs of services provided, organizations are better able to calculate their profitability. There are multiple ways to classify costs. Classifications include accounting function, management function (ie. Operating vs. nonoperating costs), traceability (ie. Direct and indirect costs), behavior (ie. Variable or fixed costs), significance to decision making (ie. Controllable costs, true costs, uncontrollable costs) (Nowicki, 2022). An example of an indirect cost, or overhead cost, would be the cost of heating. Indirect costs “cannot be traced directly to a department” (Nowicki, 2022). Opposite of indirect costs are direct costs, which can be traced to a department. Direct costs include costs of services or products (Nowicki, 2022). As an example for direct costs, at my current place of work, there is a system which we order patient specific items through an online portal, which they are then charged. The same goes for services, such as specialty consults, labs, or imaging.
Cost allocation, also known as cost analysis, is the act of assigning indirect, in addition to a portion of direct costs, to specific departments. The process of cost allocation is done in order to confirm that patients are being charged accordingly for the products and services they receive from an organization. There are multiple methods on how to go about allocating costs. One way is direct apportionment, which is one of the simpler methods. Direct apportionment takes “a one-time allocation of all costs from departments that have costs but do not generate revenue (NR), such as the housekeeping department, to cost centers of departments that do generate revenue” (Nowicki, 2022). Other options include step-down apportionment, double apportionment, and multiple apportionment (Nowicki, 2022).
Managers also take utilization rates into consideration, which is directly related to volume and produced revenue. Variable costs can change (ie. Cost of supplies based on the volume) while fixed costs remain the same (ie. Heating a hospital will cost the same regardless of the census). When associating costs with revenue and volumes, managers are able to conclude whether there is loss or profit (Nowicki, 2022). A prime example of utilization rates related to volume and revenue is the decreased revenues many hospital’s faced during the COVID-19 pandemic. During the pandemic, there was a decrease in volume of patients coming into the ED, which can be attributed to a decrease in revenue (Bednar, 2020).
