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

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

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

10. Reciprocal Service Arrangement5%
10%
Environmental Services
Accounting
50%
45%
60%
30%
Operating Room
Psychiatric Care
Exhibit 2

11. 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

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

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

14. 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)
10% % %
Beginning balances (all amounts are in thousands)
Exhibit 5

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

16. Accounting distribution
Step-Down Method
Environmental Services
Operating Room
Psychiatric Care
Accounting
Total
$300 $100 $1,600 $1,000 $3,000
(300)
(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

17. Step-Down Method Environmental Services Operating Room
Psychiatric Care
Accounting
Total
$300 $100 $1,600 $1,000 $3,000
(300)
(130) 62 68
$ $ 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. 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 x environmental services from each side of the equation.

20. 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.

21. 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.

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

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

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

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

26. 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.

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. Design of the Cost Allocation System
Exhibit 7

29. Appendectomy Cost Report
Exhibit 8

30. 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.

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. Statistical Process Control Chart for Hydration Data
Exhibit 12

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

35. Chemo-therapy Treatment
Critical Path Utilization
Day 1
Hydration
Meals:
no fried or spicy foods
Chemo-therapy Treatment
Knowledge Assessment
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. Chapter M13
THE END