“Product costing has become much more critical to healthcare executives today than it was before…

“Product costing has become much more critical to healthcare executives today than it was before 1983. The emphasis on prospective prices and competitive discounting creates a real need to define costs. For healthcare purposes, the product is a treated patient or an encounter of care. Various aggregations of patients also may be useful. For example, we may want to develop cost data by DRG, by APCs, by clinical specialty, or by payer category. To develop estimates of cost in a healthcare firm, two costing systems must be defined. First, a series of SCPs must be developed for all SUs. These SUs comprise the specific set of services that were or will be performed in the treatment of a specific patient encounter and represent intermediate departmental products produced by the firm. This part of costing is analogous to that of most manufacturing systems. Second, a set of STPs must be defined for major patient-treatment categories. These STPs must identify all the SUs that were or will be provided in the patient treatment. Physician involvement is critical in this area. The purpose of costing is to make planning decisions, such as those involved in pricing and product mix, more precise and meaningful. Costing is also useful when making control decisions. Actual cost data can be compared to budgeted costs and corrective action taken when costs appear to be out of control. Most management control processes involve the following four phases of activity: programming, budgeting, accounting, and analysis and reporting. Budgeting is an activity that many department managers view as the primary focus of management control because of its direct focus on resource allocation and emphasis on efficiency. Efficiency standards are primary inputs into the budgeting process and are often provided through comparative benchmarking data. In general, within the framework for cost control, the following two approaches are possible: preventive and detection–correction (DC). The DC approach is usually based on some system of variance analysis. From a decision-theory perspective, the investigation of a variance is based on the cost of investigation, the probability that a correctable problem exists, the potential loss if the problem is not corrected, and the costs of problem correction. It may not always be possible to develop truly objective measures for these values, but sensitivity analysis may offer a useful aid in such situations.”

1. This week, we learned about categories of costs and cost behavior, managing costs, and management control and budgeting. Write a narrative essay (minimum 1000 words) in which you address and discuss cost behavior, managing costs, and management control budgeting. Also address the scenario below. Write the essay in YOUR own words. No plagiarism for an upvote please!!

• You have just started as an entry-level accountant in your small 20 bed hospital. You need to get the buy-in of your board to agree to a project to help your organization stay on the cutting edge; however, they do not understand the concept of budgeting. You are asked to make a presentation to the board to explain the budgeting process. Included in that presentation you must create a spreadsheet delineating the components of a hospital budget. First, discuss the nature and use of budgets for management control and budgeting process. Next, prepare a budgeted income statement with hypothetical numbers for illustration purposes.