Exam #2

Question 1

What is the difference between fixed and variable costs?

Answer 1

Fixed costs are the costs that are not related to the volume of services delivered. Variable costs are those costs that are expected to increase and decrease with volume.

Question 2

What is the difference between financial and managerial accounting?

Answer 2

Financial accounting- for external use, required by GAAP, uses historical data.
Managerial Accounting- increased detail, sub-units, for future predictions/use, not required by GAAP.

Question 3

What is contribution margin, and how is it calculated?

Answer 3

The amount brought in to cover variable and fixed costs, as well as increase profit.

Revenue - Variable Cost = CM

Question 4

What is the best cost structure if an organization is capitated or FFS, and why?

Answer 4

Capitated- Fixed Costs
FFS- Variable Costs
This is because the reimbursement is matched with the cost structure.

Question 5

What is volume break even, and how is it calculated?

Answer 5

Volume break even is the volume needed to cover fixed and variable costs.
TR - TVC - FC = $0
TCM = FC

Question 6

What is operating leverage, and how is it calculated?

Answer 6

Operating leverage reflects the extent to which an organization’s costs are fixed. It is measured in degree of operating leverage (DOL).
DOL = CM/Profit

Question 7

What is CVP, and how is it used?

Answer 7

Cost-volume-profit analysis allows managers to examine the effects of alternative assumptions regarding costs, volume, and prices. This allows them to select the correct price for products and services.

Question 8

What is the difference between direct and indirect costs?

Answer 8

Direct- Unique and exclusive to the unit.

Indirect- result from 2 or more units sharing the same resources.

Question 9

What are the methods of cost allocation?

Answer 9

Direct, Reciprocal, and Step-down

Question 10

Describe the Direct, Reciprocal, and Step-down methods for cost allocation.

Answer 10

Direct- Ignores all intrasupport between departments.
Step-down- Recognizes some, but not all intrasupport
Reciprocal- Recognizes all intrasupport between depts.

Question 11

What are the two characteristics that all cost drivers must have to be effective?

Answer 11

Cost drivers must be fair, and must control costs.

Question 12

What is a cost pool?

Answer 12

A cost pool is a dollar amount of overhead services to be allocated.

Question 13

What is a cost driver?

Answer 13

A cost driver is the basis on which a cost pool is allocated.

Question 14

How is the allocation rate found?

Answer 14

Cost Pool / Cost Driver = Allocation Rate

Question 15

Would multiple allocation rates ever be used, and if so, why?

Answer 15

Yes, they are often used when there are multiple goods and services produced by the organization. For example, housekeeping, financial services, etc.

Question 16

What is the difference between traditional and ABC allocation?

Answer 16

Activity-based costing is far superior to traditional costing because it takes a bottom-up approach involving more people. It also is more detailed and specific.

Question 17

Are healthcare organizations typically price setters or price takers?

Answer 17

They are usually a combination of the two. They take prices from insurance companies, but set prices in some select services in high demand.

Question 18

What is the difference between full cost pricing and marginal cost pricing?

Answer 18

Full cost- Covers all costs plus profit.

Marginal cost- Doesn’t cover the full cost of service, and money is typically lost.

Question 19

What is cross-subsidization?

Answer 19

When some patients are undercharged and others are overcharged.

Question 20

Define the Values Statement

Answer 20

Core priorities that define the organizations culture.

Question 21

Define the Mission Statement

Answer 21

Defines the organization’s overall purpose and reason for existence.

Question 22

Define the Vision Statement

Answer 22

Describe the desired position of the organization at a future point in time.

Question 23

Define the Organizational Goals

Answer 23

Specific aims that management strives to attain. Qualitative in nature.

Question 24

Define the Organizational Objectives

Answer 24

Specific aims that management strives to attain. Quantitative in nature.

Question 25

Define Operating Plan

Answer 25

An organizational roadmap for the future, often 5 years.

Question 26

Define Financial Plan

Answer 26

The portion of the operating plan that focuses on finance.

Question 27

What is bottom-up and top-down budgeting?

Answer 27

Top down is when administration gives a budget to a department. The decision is made at the top and falls down. Bottom up is when the departments make a budget and go to the top for approval.