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Provider Cost Finding Methods
Chapter 12
Learning Objectives
• Identify three methods to estimate costs
• Calculate costs using a step down method
• Calculate costs using an activity based method
• Understand the major advantages and disadvantages of activity based costing
Cost to Charge Ratio (CCR)
• Common method used by dentists and physicians
• An assumed relationship of cost to charges usuallydetermined by industry norms
• An advantage is simplicity
• Disadvantages- typical of industry may not apply to wholeorganization, CCR may be inaccurate
Step Down Method
• A cost finding method based on allocating costs that are notdirectly paid for (indirect costs) to products or services thatare directly paid for(direct costs)
• 4 steps used to allocate utilities, administration andlaboratory costs
• Fully allocated cost-Cost of a cost object that includes bothits direct costs and all other costs allocated
Cost allocation: Example
Solution:
Activity Based Costing (ABC)• Method of estimating the costs of a service or product by
measuring the costs of the activities it takes to produce thatservice or product
• Top–down approach
• Because it begins with all the costs and allocates themdownward into various services for which payment will bereceived.
• Bottom up approach
• It finds the cost of each service at the lowest level, the pointat which resources are used and aggregates them upwardinto products
Cost Terminology
• Direct Costs-Costs that an organization can trace to a cost object
• Indirect costs-Costs that cannot be traced to a particular cost object
• Cost Driver- Things that cause a change in the cost of an activity
Summary
• Must be able to measure costs accurately
• 3 approaches
• Cost to Charge Ratio (CCR)
• Step Down Method
• Activity Based Costing