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Financial Management Essay

1309 words - 6 pages


The Housekeeping Service department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 in direct costs in 2007. These costs must be allocated to Ruger’s three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5million in total revenues in 2007, and to support these clinical activities, they used 5,000 hours of housekeeping services.

1) What is the value of cost pool?
Sol)A critical part of cost measurement at the subunit level is the assignment or allocation, ...view middle of the document...

CVP in managerial accounting is a form of cost accounting, It is a simplified model used for elementary instructions and short-run decisions.
CVP analysis expands the use of information provided by breakeven analysis. A critical point of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), the company will experience no income or loss. CVP employs the same basic assumptions as in break-even analysis. CVP assumes: 1) Constant sales price, 2) Constant variable cost per unit, 3) Constant total fixed cost, 4) Constant sales mix, & 5) Units sold equal units produced. These are simplifying, largely linearizing assumptions, which are often implicitly assumed in elementary discussions of costs and profits. One of the main methods of calculating CVP is Profit volume ratio is (contribution/sales)*100, where contribution = Sales – variable costs. Therefore it gives us profit added per unit of variable costs.
CVP analysis is done using equations and graphs. The assumptions of CVP model yield the following linear equations:
Total Costs = Fixed Costs + (Unit variable cost + number of units)
Total Revenues = Sales Price * number of units)
The graphs of above equations are linear because of assumptions of constant costs and price, and there is no distinction between units produced and units sold, as these are assumed to be equal. Profit can be computed by TR – TC, where profit can be negative o profit.
CVP is useful to Health services manager because it allows them to examine the effects of alternative assumptions regarding costs, volume, and prices. Such information helps managers to evaluate future courses of action regarding pricing and the introduction of new services.

4) Compare and Contrast the following three methods of developing capitation rates: fee-for-service approach; cost approach; and demographic approach.
Sol) Capitation is a payment method for medical services where the doctor or the hospital is paid a certain fee for each patient enrolled as a member of the insurance contract. The fee paid to the hospital is usually fixed as outlined in the contract between the hospital and the insurance company. The amount paid by the insurance company constitutes the capitation rate. There are three primary methods of developing capitation rates are:
1) Fee-for-service approach: Under this approach, the fee for each healthcare service offered by the hospital or the doctor is paid directly by the person receiving treatment. The medical fee charged to the patient is decided by the doctor and can be negotiated with the patient. Therefore the more patients the doctor treats the more revenue the doctor will receive. However, depending on the states, fee-for-service rates may not be determined by the doctor or he hospital, instead the Health Management Organization (HMO), which provides healthcare insurance coverage to its members through doctors or hospitals with...

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