A Closer Look at Service Organizations Chapter M13 A Closer Look at Service Organizations PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2005 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Stonebrook Medical Center Stonebrook Medical Center is a for-profit medical facility that offers a wide range of health-care services.

Stonebrook Medical Center A group of individuals with diverse backgrounds have been selected by an administrative leader to serve on a committee to improve the clinical and financial outcomes at Stonebrook.

Stonebrook Medical Center Currently, the facility-wide-cost-to-charge ratio is 0.704 based on the following calculation: Total costs $88,000,000 Total charges $125,000,000 =

Once you have completed this chapter, you should be able to: Objective 1 Explain how costs are classified within service organizations.

Modern Cost Management Systems for Service Organizations A reciprocal service arrangement exists when support departments exchange services.

Modern Cost Management Systems for Service Organizations Health-care cost systems commonly use either a step-down or a simultaneous algebraic equation method to allocate costs among support departments.

Conceptual Design of the Stonebrook Medical Center Cost Accounting System Exhibit 1

Once you have completed this chapter, you should be able to: Objective 2 Allocate support department costs to revenue-producing departments.

Reciprocal Service Arrangement 5% 10% Environmental Services Accounting 50% 45% 60% 30% Operating Room Psychiatric Care Exhibit 2

Department Direct Costs Prior to Allocation Accounting $ 100,000 Environmental services 300,000 Operation room 1,600,000 Psychiatric care 1,000,000 Total $3,000,000 Exhibit 3

Graph of Cost Flows Using Step-Down Method Environmental Services Operating Room Psychiatric Care Accounting Exhibit 4

Graph of Cost Flows Using Step-Down Method Environmental Services Accounting Operating Room Psychiatric Care Exhibit 4

Beginning balances (all amounts are in thousands) Step-Down Method Environmental Services Operating Room Psychiatric Care Accounting Total $300 $100 $1,600 $1,000 $3,000 (300) 30 180 90 10% 60% 30% Beginning balances (all amounts are in thousands) Exhibit 5

Accounting distribution Step-Down Method Environmental Services Operating Room Psychiatric Care Accounting Total $300 $100 $1,600 $1,000 $3,000 (300) 30 180 90 45% 50% Accounting distribution Exhibit 5

Accounting distribution Step-Down Method Environmental Services Operating Room Psychiatric Care Accounting Total $300 $100 $1,600 $1,000 $3,000 (300) 30 180 90 (130) 62 68 $130,000 x 0.45 ÷ 0.95 = $61,579 or $62,000 (rounded) $130,000 x 0.50 ÷ 0.95 = $68,421 or $68,000 (rounded) Accounting distribution Exhibit 5

Step-Down Method Environmental Services Operating Room Psychiatric Care Accounting Total $300 $100 $1,600 $1,000 $3,000 (300) 30 180 90 (130) 62 68 $ 0 $ 0 $1,842 $1,158 $3,000 Exhibit 5

Reciprocal Service Arrangement Environmental services = $300,000 + (0.05 x accounting) Accounting = $100,000 + (0.10 x environmental services) Step 1 Define the mathematical relationship. Environmental services = $300,000 + 0.05 ($100,000 + 0.10 x environmental services) Step 2 Substitute the mathematical definition of accounting.

Distribute 0.05 across both terms in parentheses. Reciprocal Service Arrangement Environmental services = $300,000 + $5,000 + (0.005 x environmental services) Step 3 Distribute 0.05 across both terms in parentheses. Environmental services – (0.005 x environmental services) = $300,000 + $5,000 Step 4 Subtract 0.005 x environmental services from each side of the equation.

Divide each side of the equation by 0.995 Reciprocal Service Arrangement 0.995 x environmental services = $305,000 Step 5 Combine terms. Environmental services = $306,533 Step 6 Divide each side of the equation by 0.995 Now, Accounting can be determined.

Define the mathematical relationship. Reciprocal Service Arrangement Accounting = $100,000 + (0.10 x environmental services) Step 1 Define the mathematical relationship. Accounting = $100,000 + (0.10 x $306,533) Step 2 Substitute the value of Step 6 (Slide 19) into the accounting equation.

Multiply terms within parentheses. Reciprocal Service Arrangement Accounting = $100,000 + $30,653 Step 3 Multiply terms within parentheses. Accounting = $130,653 Step 4 Combine terms.

Reciprocal Service Arrangement In Thousands Exhibit 6 Environmental Services Operating Room Psychiatric Care Accounting Total $100 $300 $1,600 $1,000 $3,000 (131) 7 59 65 $130,653 x 0.05 (rounded) $130,653 x 0.45 (rounded) $130,653 x 0.50 (rounded)

Reciprocal Service Arrangement In Thousands Exhibit 6 Environmental Services Operating Room Psychiatric Care Accounting Total $100 $300 $1,600 $1,000 $3,000 (131) 7 59 65 31 (307) 184 92 $306,533 x 0.10 (rounded) $306,533 x 0.60 (rounded) $306,533 x 0.30 (rounded)

Reciprocal Service Arrangement In Thousands Exhibit 6 $100 $300 $1,600 $1,000 $3,000 31 (307) 184 92 Environmental Services Accounting Operating Room Psychiatric Care Total (131) 7 59 65 $ 0 $ 0 $1,843 $1,157 $3,000

Once you have completed this chapter, you should be able to: Objective 3 Calculate costs of providing various services to customers and discuss how service costs may be used to make better decisions.

Cost Management Systems for Service Companies Management’s final objective was to design a cost system that would attach costs to each patient based on resources consumed while treating the patient.

Design of the Cost Allocation System Exhibit 7

Appendectomy Cost Report Exhibit 8

Once you have completed this chapter, you should be able to: Objective 4 Describe various strategies used by service organizations to improve quality and reduce costs.

Performance Measurement and Cost Management Strategies in the Service Environment Operations restructuring involves a complete evaluation of the relationships among multiple processes and is conducted to improve the quality and efficiency of services provided to customers.

Outcomes Data Dissemination Outcomes data dissemination is the practice of sharing process and outcomes information with those who make resource decisions.

Statistical Process Control Chart for Hydration Data Exhibit 12

Critical Path Utilization A critical path outlines the steps needed to complete a process.

Chemo-therapy Treatment Critical Path Utilization Day 1 Hydration Meals: no fried or spicy foods Chemo-therapy Treatment Knowledge Assessment Exhibit 13

Critical Path Utilization Day 2 Chemotherapy Treatment Meals: no fried or spicy foods Day 3 Chemotherapy Treatment Meals: no fried or spicy foods Discharge Exhibit 13

Chapter M13 THE END