Essentials Of Cost Accounting

Business

Quiz 12 :

Measuring Productivity

Quiz 12 :

Measuring Productivity

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Distinguish between engineered, committed, and discretionary costs.
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Cost centre is a responsibility centre in which every manager is held accountable for controlling cost of inputs. Costs for the health care organization are generally falls into three categories which are: engineered cost, committed cost and discretionary cost.
It is required to bring the difference among three costs:
Discretionary Cost is the cost which is incurred in the different departments that are indispensable to the organization but does not have definite input output relation which means a definite relation between cost incurred and the value of service does not subsist in such cost. Such costs generally incur every year and represent the amount that clearly depends on the judgment of management which is appropriate under certain situations.
Engineered costs are the cost for which proper amount can be estimated and involves direct labor cost and direct material cost. Such costs have specific relation between input and output. Such cost can be controlled by utilizing flexible budget variance where the concept of flexible budget is state that direct relation exists between input and output.
Committed cost are the cost which can not changed during short run which means such cost are of fixed nature. Such costs are controlled by utilizing capital budget where estimated costs are compared with estimated benefits.
Examples for three costs are as:
Examples for discretionary cost are cost incurred on research and development, cost incurred on advertisement
Examples for engineered cost are cost incurred on material or labor
Examples for committed cost are: depreciation on equipment, long term lease.
All three costs have different cost behavior:
Discretionary cost can be variable, fixed or mixed. Committed cost is generally fixed and engineered cost can be fixed or variable.
The basic difference among all the three cost is regarding controlling the cost.
Discretionary cost is complex to control whereas engineered cost are controlled by utilizing flexible budget and committed cost are the cost which are controlled by utilizing flexible budget.

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What is the difference between total productivity and partial productivity?
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Productivity reflects the total output company is able to produce with given level of input for given period of time. It can be understood as the ratio between total outputs to total inputs. Productivity can be measured by two ways one is total productivity and other is partial productivity. Normally productivity can be measured in terms of the dollar as well as physical units.
It is required to bring the difference between total productivity and partial productivity:
Total productivity is the ratio between total output and total input where total input is the sum of the capital, labor, supplies and overhead. Whereas partial productivity is defined as the ratio between the total output and partial output
Total productivity can be calculated by the given formula:
img Whereas partial productivity can be calculated by given formula:
img Total productivity can be is generally measured in terms of the dollar. Whereas partial productivity measures the productivity in terms of physical units
Significance of total productivity is that it reflects the monetary benefits of better productivity.
Whereas partial productivity permits management to focus on specific input and its impact

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What are efficiency and effectiveness? How can these concepts be used to control discretionary costs?
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Discretionary Cost is the cost which is incurred in the different departments that are indispensable to the organization but does not have definite input output relation which means a definite relation between cost incurred and the value of service does not subsist in such cost. Such costs generally incur every year and represent the amount that clearly depends on the judgment of management which is appropriate under certain situations.
One of the methods in order to control difficulty of discretionary cost is to focus on effectiveness and efficiency of the department.
Effectiveness is defined as the ability of an organization to meet its predetermined goals. Any department set certain goals for itself and after the evaluation of performance if department is able to meet its predetermined goals then such department is effective.
Efficiency refers to the ability of the company to achieve its goal with minimum cost of resources.
The significance of the efficiency and effectiveness in controlling discretionary departments can be understood by given example:
By using efficiency and effective ratio productivity of personnel department can be evaluated:
Productivity of hiring function of personnel department can be evaluated by using acceptance ratio, calculating cost per hire. Where cost per hire is calculated by dividing total cost of hiring by total hires. This ratio provides better suggestion of efficiency of personnel department.
Effectiveness of the personnel department can be determined by retention ratio, where retention ratio provides basis for the comparison between person who were hired in earlier year and are still in the organization. This ratio provides suggestion of effectiveness of personnel department.
Thus from above example it can be understood how efficiency and effectiveness control discretionary cost.

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What are some difficulties related to measuring productivity in the health services area?
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How can you determine if the relationship between direct and indirect costs needs to be reevaluated?
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Can productivity of indirect costs be measured? If so, how? It' not, why not?
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What are some examples of discretionary cost centers or departments in health care organizations?
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WeTypelt, an outsourced medical records transcription company, wishes to see if staff in their Riverside Medical divison has become more productive in the past quarter. The division processes medical records for four specialties at Riverside Medical, including cardiology, infectious disease, gastroenterology, and dermatology. In the baseline period, they handled the following mix of transcriptions: img This year there were 3,200 cardiology, 1,500 infectious disease, 800 gastroenterology, and 300 dermatology transcriptions performed. The total time to perform these tasks was 3,950 hours. a. Calculate the index of output. b. Calculate the index of labor hours. c. Calculate the index of output per labor hour. d. Calculate the percent change in productivity, and indicate if productivity improved or declined.
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Suppose that the direct time in a hospital pharmacy was 54,000 hours of labor, and that a study indicates indirect time is generally required to be 33 percent of direct time. During the year, excluding vacation, holidays, and education time, the laboratory department paid for 80,000 hours of labor. How productive was the department in terms of its total use of direct and indirect costs?
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According to the text, what is the most common measure of productivity?
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Consider a discretionary cost center or department ( other than personnel services ) and design a set of efficiency and effectiveness ratios to monitor productivity for that cost center or department.
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The Long Life Nursing Home recently bought new equipment for the kitchen with the hopes of increasing food worker productivity. Based on the cost of the equipment and its lifetime, it has been estimated that the investment will be worthwhile if they can improve productivity by 5 percent. Last year, before undertaking the purchase, a special study was conducted. Its results indicated that it took 15 minutes to prepare a standard meal, 18 minutes to prepare a low-sodium meal, and on average 24 minutes to prepare meals with other special requirements. Last year, the nursing home prepared 200,000 standard meals; 40,000 low-sodium meals; and 50,000 other special meals. This year, they prepared 170,000 standard meals; 45,000 low-sodium meals; and 60,000 other special meals. The total time for the food workers this year was 76,500 hours. Using a partial productivity ratio, determine if the nursing home achieved the desired 5 percent productivity gain.
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Why is control of discretionary costs difficult?
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