Quiz 2: Cost Definitions


Cost  refers to the valuation of efforts, resources, time and utilities used in terms of money that incurs in the production process. There are various types of cost like accounting cost, average cost, cost center, cost objective, direct cost, marginal cost, fixed cost, variable cost, joint cost, opportunity cost and so on. Definition of Cost objective and its example are written as follows: Cost objective is any particular item for which cost is measured separately. It can be a product or a department also. For example: For direct materials, direct labor and manufacturing overhead a product is a cost objective as manufacturing company will calculate the cost of each product separately.

Production cost per unit of output refers to the total cost divided by the total quantity. This production cost per unit is called as the average cost per unit of output. It is calculated to know the average cost per unit of output. Thus, the average cost in case of health care organization is calculated using the formula: img The MCO has given a proposal of 1000 patients visit per year with revenue of $70 per visit. Whereas city rehab is already treating 1500 patients at $95 per visit with additional $7500 fixed cost. a. Calculate current average cost by using the formula when the Number of visits is 1000, variable cost is $67 per visit, fixed cost is $7500 and the revenue per visit is $95. img Thus, the average cost at present, is img . b. Since, the MCO has offered to additional patients of 1000.The total number of patients would increase to 2500.It is calculated as follows: img However, the hospital has additional capacity of 500 seats only. Thus, if it accepts offer then it can only provide service to additional 500 patients only and not 1000. Calculate the average cost per visit, if the organization chooses to accept only 500 additional patients and works on its full capacity. img Thus, the average cost of partially accepting the proposal is $70.75. Thus, even if city rehab accepts offer for only 500 patients also, then also, the average cost per visit ($70.75) is more than the revenue ($70). The loss is calculated underneath. img Hence, there is loss of $0.75. Thus, with short term perspective, the project will provide loss of $0.75 per visit, to the organization. Hence is should not be accepted. However, in long term perspective then the above proposal of only 500 patients (partial acceptance) can be accepted as it is covering the variable cost of $67 and a loss of $0.75 on each visit which is very minute. c. If MCO is paying flat amount $4 on each of its 10,000 Medicare covered lives then also there is requirement of fixed cost on treatment of these lives. Also, C. rehab's Medicare real rate and variable cost (flat amount) needs to be determined to know whether C rehab should accept the proposal or not.

Total cost related with cost objective is called full cost where cost objective refer to the specific item for which cost is to be known for example if cost for a specific class of patients is to be known then represents cost objective. Costs that are incurred in the treatment of the several or various types of patients are known as joint cost. Such costs are incurred by the organization until these patients are not treated by the organization. For example usage suction device by the hospitals which can be used in the clearing airways of blood, saliva and other secretions so that patients can breathe. In order to perform clearing of airways of blood, saliva or other secretion hospital need a suction device. If clearance of airways of saliva is stopped by the hospital then it must need suction device for clearing airways for blood and other secretions. Therefore the opportunity cost for suction device for clearing airways for saliva is zero. Similarly if clearing for saliva is performed then opportunity cost for blood and other secretion is zero. Therefore hospital spend significant amount on suction device.