Cost Concepts
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| What is a unit of service? | A basic measure of of the item being produced by the organization
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| What are examples of units of service (as it pertains to healthcare)? | Clinic visits, discharged patients, patient days, home care visits
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| What are fixed costs? | costs that do not change in total as the volume of a service of unit changes; constant
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| What are variable costs? | costs that vary directly with the volume of service units
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| What are examples of variable costs? | linen, medical supplies
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| What are examples of fixed costs? | Management salaries (i.e. CNO)
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| What is "relevant" range? | Represents the likely range of activity covered by a budget; for example, a relevant range for a unit that expects 80% occupancy might have a range of 75-85%
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| Variable costs increase _____?_____ to relevant range. | Proportionally
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| Are fixed costs truly "fixed" over any range of activity? | NO. For example, if census was low enough to close a unit, the presumed fixed cost of a unit manager salary would be eliminated; costs are fixed over a RELEVANT RANGE.
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| What are step-fixed (step-variable) costs? | Costs that vary within the relevant range, but NOT smoothly. They are fixed over intervals shorter than the relevant range
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| What is an example of a step-fixed cost? | Staff
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| What are mixed costs? | Cost that contains fixed cost and some variable cost
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| What are examples of mixed costs? | Electricity, water
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| While the fixed costs don't necessarily rise or fall, what can make fixed costs "rise?" | Low census; essentially, the fixed costs are "carried" by less patients, increasing the price per patient of fixed costs
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| What are relevant costs? | Costs that change as a result of a decision
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| What is "margin" referring to in marginal analysis? | Refers to a change from current conditions by even a minor amount; a patient on the margin refers to adding one more patient or reducing volume by one patient.
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| What are marginal costs? | The costs of treating one more patient
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| What are constant dollars? | Amounts that have been adjusted for inflation; represented by a percentage, with the baseline year being 100 or 100%
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| Should inflation be calculated in budget planning? | In short, NO. Data used should be free from the impact of inflation, BECAUSE inflation is hard to predict (increase isn't constant). SO, calculations should be made in constant dollars
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| How does the High-Low cost approach cost estimation? | For a period of time (usually 5yrs), find the highest volume and lowest volume and compare costs at the two volumes. The amount by which volume changed should be compared to the amount cost changed. It will give you approximate "cost" per patient
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| How is regression analysis done? | Volume of patient days and costs for various years are put on a graph. The result is a scatter diagram. If a line is draw connecting the points, it can be used for future predictions
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| What is the meaning of a line on the scatter plot of regression analysis? | It is a mathematical representation (gets as close as possible to points) of prediction of costs. Allows of break down of costs accurately into fixed and variable costs.
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| What is simple linear regression analysis? | Can take all available past information into account in estimating the portion of any cost that is fixed and the position that is variable. It is "simple" because there is only 1 DEPENDENT and 1 INDEPENDENT variable
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| Variable costs are treated as if they were _______, even if that is only an approximation of their true behavior | LINEAR
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| Regression analysis is helpful in separating _______ costs. | MIXED
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| Regression analysis is a __________ technique. | STATISTICAL
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| What is R-squared? (R2) | A statistic provided by calculator or computer that determines effectiveness of regression analysis
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| What does R-squared values tell us? | Indicates how "related" the independent variable is to dependent variable; essentially, effectiveness of regression analysis. Score ranges from 0-1; higher the score, the greater the predictive "strength" (i.e. accuracy)
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| What does multiple regression allow as opposed to simple linear regression? | Allows for the use of multiple independent, or casual, variables.
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| Is multiple regression superior to single linear regression? | yes, BUT not substantially. It usually adds a lot more work without drastically changing results.
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| What does break-even analysis do? | Determine whether or not a program (or center, unit, clinic) will make profit or lose money--OR break even
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| A major key to profitability is....? | VOLUME (patient)
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| What is the contribution margin? | The different between the price (of service--what is charged to patient) and the variable cost (what is costs the facility to provide the service); essentially, how much the institution "makes" per service
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| What is the formula for break-even analysis? | Q = FC / P - VC . Quantity (of patients) = Fixed costs, DIVIDED by Price (paid for service) MINUS variable cost (cost of service to facility)
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| True or false: Most new businesses begin making profit shortly after inception (start-up)? | FALSE. Most businesses do not start making profit until after 2-3yrs
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| What are three options to reduce volume required to break even? (essentially, volume is to low to break even, so something needs to be done to make a lower volume profitable) | (1) lower fixed costs, (2) Increase prices (can have negative backlash effects), (3) reduce variable cost per unit--improve efficiency
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