1 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. A Closer Look at Service Organizations Chapter M13

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

3 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.

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

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

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

7 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.

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

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

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

11 Department Direct Costs Prior to Allocation Accounting$ 100,000 Environmental services300,000 Operation room1,600,000 Psychiatric care 1,000,000 Total$3,000,000 Accounting$ 100,000 Environmental services300,000 Operation room1,600,000 Psychiatric care 1,000,000 Total$3,000,000 Exhibit 3

12 Graph of Cost Flows Using Step-Down Method Environmental Services Accounting Operating Room Psychiatric Care Exhibit 4 Step 1

13 Graph of Cost Flows Using Step-Down Method Environmental Services Accounting Operating Room Psychiatric Care Step 2 Exhibit 4

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

15 45% 50% Accounting distribution Step-Down Method Environmental Services Accounting Operating Room Psychiatric Care Total $300 $100 $1,600$1,000$3,000 (300) Exhibit 5

16 Exhibit 5 Accounting distribution $130,000 x 0.45 ÷ 0.95 = $61,579 or $62,000 (rounded) Step-Down Method Environmental Services Accounting Operating Room Psychiatric Care Total $300 $100 $1,600$1,000$3,000 (300) $130,000 x 0.50 ÷ 0.95 = $68,421 or $68,000 (rounded) (130)6268

17 Step-Down Method Environmental Services Accounting Operating Room Psychiatric Care Total $300 $100 $1,600$1,000$3,000 (300) (130)6268 $ 0 $ 0 $1,842$1,158$3,000 Exhibit 5

18 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, ($100, x environmental services) Step 2 Substitute the mathematical definition of accounting.

19 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 x environmental services from each side of the equation.

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

21 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.

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

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

24 Reciprocal Service Arrangement $100 $300 $1,600$1,000$3, (307)18492 In Thousands $306,533 x 0.10 (rounded) Environmental Services Accounting Operating Room Psychiatric Care Total $306,533 x 0.60 (rounded) $306,533 x 0.30 (rounded) (131) Exhibit 6

25 Reciprocal Service Arrangement In Thousands $100 $300 $1,600$1,000$3, (307)18492 Environmental Services Accounting Operating Room Psychiatric Care Total (131) $ 0$ 0$1,843$1,157$3,000 Exhibit 6

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

27 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.

28 Exhibit 7 Design of the Cost Allocation System

29 Exhibit 8 Appendectomy Cost Report

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

31 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.

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

33 Exhibit 12 Statistical Process Control Chart for Hydration Data

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

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

36 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

37 THE END Chapter M13

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