William A. Kramer and Assoc., Inc.
Financial Management Solutions for
Small and Medium Sized Hospitals
What is the purpose of Cost Accounting? Why do I need it?
What can't I do already with my current financial statements?
The purpose of Cost Accounting from management's perspective is to provide good data on a timely basis that provides enough detail to answer important questions that arise in many decision-making situations.
EXAMPLE SITUATIONS
" I have to replace my chemistry analyzer. I have four bids from venders. Which of the four analyzers will financially meet my needs without spending too much money on a fancy machine that we don't really need?"
"The local manufacturer in my community has asked for a 25% discount for their drug tests sent to the hospital this year. Is this good or bad for the hospital? If it is bad, how can I successfully defend any counter proposal that I prepare for them?"
"Where are my costs too high compared to payment for DRG 89? Is my utilization of resources too great? How can I determine whether my labor costs are too high because of wage rate variance or productivity? Is it supply cost or supply utilization?"
"How can I compute the various effects of potential contracts ahead of time so that more than one option is available to me."
Why do we need Cost Accounting?
Good data provides the basis for sound decisions. Without good financial data, it is much more likely that a bad decision will be made that translates to time and money being unavailable to meet the goals of the organization.
Why can't I use my current financial statements to make these decisions?
Payment results from a combination of services provided, the contract with the payer and the time required to collect. Cost is a product of the specific services provided to a patient. The difference is profit or margin. For timely reporting, both payment and cost must be calculated. Payment is calculated per patient and Cost is calculated per service code.
Since payments and cost can be compared at the patient level, then patient payments, cost and margin can be sorted and accumulated by payer, physician, employer, sex, age, zip code etc. This is not possible with a General Ledger system.
Practical Uses of Cost Accounting
The Argument for Standard Cost over Allocated Costs