...Cost Behaviors and Allocation Health Financial Management Cost allocation is essentially a pricing process within the organization whereby managers allocate the costs of one department to other departments (Gapenski, pg 188). Because this pricing process does not occur in a market setting, no objective standard exists that establishes the price for the transferred services (Gapenski, pg 188). Cost allocation within a business must, to the extent possible, establish prices that proxy those that would be set under market conditions (Gapenski, pg 188). The goal of cost allocation is to assign all of the costs of an organization to the activities that cause them to be incurred (Gapenski, pg 188). Ideally, health services managers track and assign costs by individual patient, physician, diagnosis, reimbursement contract, and so on (Gapenski, pg 188). Managers at all levels within health services organizations are under pressure to optimize economic performance, which translates into reducing costs (Gapenski, pg 188). Many department heads are evaluated, and hence compensated and promoted, other dimensions is satisfactory (Gapenski, pg 188). Department heads are held accountable for the full costs associated with services performed by their departments (Gapenski, pg 188). Health care costs are increasing at an annual rate of 7% a year, which if sustained will bankrupt Medicare in nine years and increase the nation’s overall...
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... Introduction Costs are linked with all types of organizations- business, nonbusiness, manufacturing, retail and service. Cost behavior, Cost accounting & allocation, and Budget- these are the three key requirements to run any business nowadays. Measuring cost behavior (cost measurement) is associated with understanding and calculating how activities of an organization affect different levels of cost. On the other hand, cost accounting is a kind of accounting method that targets to capture an organization’s costs of production by evaluating the input costs of each step of production as well as fixed costs. Then, cost allocation is the allocating of a common cost to several cost substances. Additionally, budget is an estimate of earnings and expenses for a set period of time. These are commonly used terms in financial accounting information as well as in any business. My company is called The EBag Co. Ltd, which is in business for more than 5 years in the production sector of the market. This profitable business is earning its profits by manufacturing affordable bags for consumers of all ages. My company will use these three requirements of this assignment to make business more profitable in coming days. I will use the five methods (will talk about only 3) of measuring cost function for my company to identify which costs will change and which will remain the same with changes in sales volume. Then, I will use cost allocation chart to help me to identify what...
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...the net operating income because it will cause to the high overhead rate. The overhead rate of products is calculated by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base and the formula of that is: Predetermined overhead rate= estimated total manufacturing overhead cost / estimated total of allocation base Indeed, it is calculated before period begins using several procedures: * Estimate the total amount of allocation base, * Then, estimate total fixed manufacturing overhead cost for period and total variable manufacturing overhead cost per unit of the allocation base. * The following equation is used to estimate the total amount of manufacturing overhead: Y = a + bX (Y = the estimated total manufacturing overhead cost, a= the estimated total fixed manufacturing overhead cost, b= the estimated variable manufacturing overhead cost per unit of the allocation base, and X= the estimated total amount of the allocation base). * Finally, calculate predetermined overhead rate. Obviously, the high-predetermined overhead rate will lead to an over applied overhead and the impact of that will known at the end of the fiscal year, which is December when the balance of the manufacturing overhead is closed out to the cost of goods sold. According to the second question that I think if the Terri discuss this situation with her supervisor at the headquarters; however, if she did that she will...
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...Cost Behaviors and Allocation Chandrea D. Taylor Dr. Laura Forbes Health Financial Management November 4, 2012 Throughout the world health care has been and will always remain a major concern. It’s always a good benefit for one to be able to have an affordable health care with a continuous aim to keep the cost of health care from rising. Author Louis Gapenski states that cost behavior is the relationship between an organizations fixed costs, variable costs, and total cost (2012). Fixed costs will remain fixed but variable cost will change roughly in direct proportion to volume. Analyze the complexity of cost behaviors in health care organizations and describe how costs are classified according to their relationship with volume. When it comes to looking at cost behavior within the health care organization a great deal or majority of the cost goes towards hospital services such as building, equipment, salaried labor, and overhead, which are fixed over the short term (Roberts RR, Frutos PW, Ciavarella GG, Gussow LM, Mensah EK, Kampe LM, Straus HE, Joseph G, Rydman RJ., 1999). Hospital organization fixed costs includes but not limited to capital expenditures, employee salaries and benefits, building maintenance, and utilities (Roberts RR, Frutos PW, Ciavarella GG, Gussow LM, Mensah EK, Kampe LM, Straus HE, Joseph G, Rydman RJ, 1999). The variable costs include health care worker supplies, patient care supplies, diagnostic and therapeutic supplies and medications...
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...1) The activity measure or cost driver in this report is the number of books donated. They are not a true cost drive because they are considered a direct material rather than manufacturing overhead 2) The relevant range in this case is 0 to 12,000 books before the request for additional funds. The relevant range after the requested additional funds is 12,001 to 19,000 books. This is because the donations sector of the library is acquiring part time help. 3) a) Costs before Request | | Librarian salary allocation | $12,000 | Graduate assistant stipend | $ 5,200 | Facility cost allocation | $ 1,200 | RFID tag per book | $ .50 | Costs After Request | | Librarian salary allocation | $12,000 | Graduate assistant stipend | $ 5,200 | Facility cost allocation | $ 1,200 | RFID tag per book | $ .50 | Part-time student help | $ 5,000 | b) Costs before Request | | Librarian salary allocation | Fixed | Graduate assistant stipend | Fixed | Facility cost allocation | Fixed | RFID tag per book | Variable | Costs After Request | | Librarian salary allocation | Fixed | Graduate assistant stipend | Fixed | Facility cost allocation | Fixed | RFID tag per book | Variable | Part-time student help | Variable | c) Costs object Department | Before Request | Librarian salary allocation | Direct | Graduate assistant stipend | Direct | Facility cost allocation | Indirect | RFID tag per...
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...Dakota Office Products Case Analysis Concern over a first year loss prompted a case study of the business operations of Dakota Office Products. Harvard Business School professor Robert S. Kaplan authored the case study as an illustration of use of activity based cost allocation and profitability (Kaplan, 2005). In the case presentation, John Malone, the General Manager of Dakota Office Products (DOP) commissioned analysis of the company’s operations and cost allocation practices; it focused on the company’s distribution center. Activities that emerged as cost drivers included: commercial freight shipping, personal delivery of orders under the Desktop Delivery program, warehouse handling and space, and several product ordering and entry activities. In this paper, the cost drivers were utilized to establish activity-based costing for DOP. Profitability for two current DOP customers was also analyzed for behavior patterns that might lead to or suggest improved pricing. Specific assignment questions were detailed and answered on the topic of relative profitability of the two customers. The objective of the analysis was to utilize learnings from the profitability calculations in order to make recommendations which would return DOP to profitable operation following the year of the unexpected loss. If the methods in this paper were utilized, it is felt to be a useful tool to assist DOP management in turning the company around. Method The assignment is summarized in this...
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...Cost Allocation ACC/561 April 23, 2012 Cost Allocation The purpose of cost allocation is to identify and correctly allocate costs associated with a job, product, or service. The main uses of cost allocation are to facilitate decision-making regarding costs, justify prices charged for products and services, cost control, and for optimal utilization of resources. There are several methods used for cost allocation, depending on the type of product or service offer by the company. Variable cost allocation includes only variable manufacturing costs, such as direct materials, direct labor, and variable manufacturing overhead. Absorption cost allocation includes manufacturing costs, including both variable and fixed overhead as well as direct labor and materials. There are advantages and disadvantages of each method, and these will be explored further. Methods of Cost Allocation There are three main methods of cost allocation used by businesses: The Direct Method, the Step Method, and the Reciprocal Method. The direct method, which is the simplest of the three, allocates the costs of service departments directly to operating departments. Under the direct method, there are no costs allocated from one service department to another service department regardless of how much service may be provided between them. For instance, there would be no cost allocation between a custodial department and the mail room, even though the custodial department cleans the mail room. ...
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...Fairness in Reward Allocation Name of the student: Name of the University: Course ID: Author’s note: Introduction The discussion of the essay is associated with the fairness in reward allocation that depends on various processes. Most of the organizations are facing the problem to implement the transparent process during the reward allocation because of the individual perception. The theory regarding the fairness also suggest to implement a structured way that will adhere to the policy of the organization so that no employees remain with the dilemma that justice is coming in the proper way. The theory is used to understand the behavioral aspect of the employees and their superior where researchers have given several feedbacks that influence the process (Lund, Scheer and Kozlenkova 2013). The argument is structured in such a way that helps to understand the several aspects of the importance of the organizational fairness in the compensation management, role of organizational fairness in reward allocation, factors that are influencing fairness in reward allocation, impact of reward distribution on employees and how fairness can be achieved within the process. All the processes are discussed with the view of several researches that establish the fact of issues and solutions of the reward allocation. At the end of the essay, every topic is summarized with the findings that could help to enhance the reward allocation. Discussion Operating an organization always needs fairness...
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...Chapter 18 Comparison of Management and Financial Accounting The role of management accounting Management accounting differs from financial accounting in many respects: * Primary users * Management accounting information: managers, employees, supply chain partners * Financial accounting information: owners or stockholders, lenders, customers, government agencies * Report format * Management accounting: flexible format, driven by user’s needs * Financial accounting: based on generally accepted accounting principles * Purpose of reports * Management accounting: to provide information for planning, control, performance measurement, and decision making * Financial accounting: to report on past performance * Nature of information * Management accounting: objective and verifiable for decision making; more subjective for planning (relies on estimates) * Financial accounting: historical, objective, and verifiable * Units of measure * Management accounting: dollars at historical, current market, or projected values; physical measures of time or number of objects * Financial accounting: dollars at historical and current market values * Frequency of reports * Management accounting: prepared as needed; may or may not be on a periodic basis * Financial accounting: prepared on a periodic basis (minimum of once a year) Management accounting provides relevant information at each stage...
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...illustrate the importance of understanding cost behavior in calculating the profit/contribution of the Craddock Cup. Within this context, the case asks whether the tournament should be continued, expanded or dropped. In addition, the case provides a vehicle to discuss allocation procedures and the concept of sunk costs. Finally, the case furnishes an opportunity to develop cost-volume-profit analysis within the context of relevant costs and revenues. Questions: 1. In determining whether to keep or drop the Craddock Cup, review in detail the overhead expense allocations currently used by the CYSL. Should the overhead allocations be revised, eliminated or retained? What are the financial results to the profit/loss to CYSL of the existing (32 team) Craddock Cup with any adjustments to allocations? With this analysis, should the Craddock Cup be retained? *Please see Figure 1.1 in Appendix for profit statement and relevant figures. After looking at the numbers we decided to eliminate Rivaldo’s salary, we determined that the overhead expense allocations currently in place are not appropriate. The city field rent should be eliminated from the allocated costs as the soccer league will be renting the field regardless of whether or not the Craddock Cup occurs; it is a sunk cost. This also applies to the CYSL office rent and utilities, which will be used by the employees whether or not the tournament is held. We needed to revise the salary allocation, because we do not need to allocate Rivaldo’s...
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...U2301 Fall 2015 Professor Dinan The Craddock Cup: Questions: Fall 2015 The purpose of this case is to illustrate the importance of understanding cost behavior in calculating the profit/contribution of the Craddock Cup. Within this context, the case asks whether the tournament should be continued, expanded or dropped. In addition, the case provides a vehicle to discuss allocation procedures and the concept of sunk costs. Finally, the case furnishes an opportunity to develop cost-volume-profit analysis within the context of relevant costs and revenues. Questions: 1. In determining whether to keep or drop the Craddock Cup, review in detail the overhead expense allocations currently used by the CYSL. Should the overhead allocations be revised, eliminated or retained? What are the financial results to the profit/loss to CYSL of the existing (32 team) Craddock Cup with any adjustments to allocations? With this analysis, should the Craddock Cup be retained? 2. Calculate in detail the expected financial impact of adding an incremental 32 teams to the tournament schedule. What are the relevant revenues and costs? Provide a proposal for the expansion to the Cup to 64 teams, including ancillary revenues and costs. 3. Determine the required breakeven increase in registration fees for 64 teams, given an increase in advertising expense of $1000, 15 more college recruiters and 20 additional face books. 4. Separately, what are the required increases in registration...
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...Chapter 1 introduces you to economics—the social science that studies how individuals, institutions, and society make the optimal best choices under conditions of scarcity. The first section of the chapter describes the three key features of the economic perspective. This perspective first recognizes that all choices involve costs and that these costs must be involved in an economic decision. The economic perspective also incorporates the view that to achieve a goal, people make decisions that reflect their purposeful self-interest. The third feature considers that people compare marginal benefits against marginal costs when making decisions and will choose the situation where the marginal benefit is greater than the marginal cost. You will develop a better understanding of these features as you read about the economic issues in this book. Economics relies heavily on the scientific method to develop theories and principles to explain the likely effects from human events and behavior. It involves gathering data, testing hypotheses, and developing theories and principles. In essence, economic theories and principles (and related terms such as laws and models) are generalizations about how the economic world works. Economists develop economic theories and principles at two levels. Microeconomics targets specific units in the economy. Studies at this level research such questions as how prices and output are determined for particular products and how consumers will react to price...
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...accounting system, an important component of a firm’s information system, includes budgets, data on the costs of each product and current inventory and periodic financial reports. Internal accounting systems serve two purposes: v Provide some of the knowledge necessary for planning and decision making; v Help motivate and monitor people in organizations (control). The most basic control use of accounting is to prevent fraud and embezzlement. Design and use of cost systems An internal accounting system should have the following characteristics: v Provide the information necessary to identify the most profitable products and the pricing and marketing strategies to achieve the desired volume levels; v Provide information to detect production inefficiencies to ensure that the proposed products and volumes are produced at minimum costs; v When combined with the performance evaluation and reward systems, create incentives for managers to maximize firm value; v Support the financial accounting and tax accounting reporting functions; v Contribute more to firm value than it costs. Economic Darwinism (strong organizations will survive) Two caveats must be raised concerning too strict an application of economic Darwinism: v Some surviving operating procedures can be neutral mutations. Just because a system survives does not mean that its benefits exceed its costs. Benefits less costs might be close to zero. v Just because a given system survives does not mean it is optimal. A better...
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...Checklist for Cost Accounting Exam I Make sure that you are comfortable with ALL the homework assignments (graded and ungraded) and any examples that we worked in class! Also, you are responsible for the material presented in any handouts, including readings/articles from The Wall Street Journal. Know your vocabulary terms. Introduction– How can companies enhance the value of their management accounting systems? What roles do management accountants perform? Explain and give examples of a management accountant's scorekeeping, attentiondirecting and problem solving functions. What guidelines do management accountants use? What do we mean by different costs for different purposes? Cost Terms (Behaviors) and Purposes – What are direct costs? Indirect costs? What is the difference between cost tracing and cost allocation? Discuss the factors that affect direct/indirect cost classifications. What is a cost driver? What is the relevant range, and what is its relationship to the various types of costs? How does a fixed cost behave in total and on a per unit basis? How does a variable cost behave in total and on a per unit basis? How do these costs (in total and per unit) appear on a graph? What about a mixed cost? How do changes in the activity level affect these costs? Be able to determine cost behavior from graphical presentations. What is the gross margin? the contribution margin? Take a factual situation and calculate the gross margin percentage and the ...
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...allocating indirect costs to products. Indirect costs can be the overhead costs incurred in manufacturing a good or providing a service. 3.3 Step 2 of ABC is to identify the cost drivers associated with each activity. These cost drivers can be selected based on causal relation, benefits received, or reasonableness. 3.4 Companies using a single plantwide rate for their allocation of indirect costs usually select a volume based allocation factor, such as direct labor hours, machine hours, volume of activity, or material costs. 3.5 1. Identify the activities that consume resources. 2. Identify the cost drivers of those activities. 3. Compute a cost rate per cost driver unit. 4. Allocate costs to products by multiplying the cost driver rate times the cost driver volume consumed by the product. 3.6 1. Causal relation. Allocate costs to the product that causes the cost. 2. Benefits received. Allocate costs to the product that receives the most benefit. 3. Reasonableness. Some costs cannot be linked to products based on either causality or benefits received, so they must be allocated on the basis of fairness or reasonableness. 3.7 The traditional approach uses one allocation rate to allocate indirect costs (typically based on direct-labor hours or machine hours), and therefore is simple and relatively inexpensive to implement. The activity-based costing approach uses multiple allocation rates using several different allocation bases (for example,...
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