1. Part II: Record Financial Operations
CHAPTER 6:
COST CLASSIFICATIONS

2. Distinction Between Direct And Indirect Costs
Direct Costs are specifically associated with a particular unit or department or patient.
Direct costs directly attributable to the cost object (any until for which a separate cost measurement is desired).

3. Distinction Between Direct And Indirect Costs
Indirect Costs, on the other hand, cannot be specifically associated with a particular unit or department or patient.
Indirect costs can’t be directly attributed to the cost object (any unit for which a separate cost measurement is desired).

4. Direct & Indirect Cost: Example
Example of Direct Costs
Salaries and fringe benefits $500,000
Salaries – other professionals ,000
Medical director ,000
Medical supplies ,000
Pharmacy ,130,000
Equipment depreciation ,000
Utilities ,000
Housekeeping & laundry ,000
Property taxes ,000
Other supplies & costs ,000
Total direct costs $2,500,000
Example of Indirect Costs
Facility costs $300,000
Administrative costs ,000
Total indirect costs $600,000

5. Identifying Direct & Indirect Cost: Practice
Direct Costs
Indirect Costs
Managed care marketing expense
Real estate taxes
Liability insurance
Clinic telephone expense
Utilities for facility
Emergency room medical supplies

6. Identifying Direct & Indirect Cost: Assignment
Worksheet 1
Indirect
Cost Centers
Total Indirect Costs
Allocation Basis
CC #557 Diagnostic Radiology
CC #558
Ultrasound
CC #559 Nuclear Medicine
CC #560 CT Scan
CC #561 Radiation Therapy
Total
Transporters
$550,000 A
$132,000
$143,000
$77,000
$121,000
Receptionists
360,000 B
66,000
42,000
78,000
96,000
File Room Clerks
117,000 C
90,000
4,500
12,375
5,625
Managers
240,000
44,000
28,000
52,000
64,000
Totals
$1,267,000
$332,000
$217,500
$219,375
$286,625
$211,000
Worksheet 2
Indirect
Cost Centers
CC #557 Diagnostic Radiology
CC #558
Ultrasound
CC #559 Nuclear Medicine
CC #560 CT Scan
CC #561 Radiation Therapy
Total
Direct Costs
$1,100,000
$700,000
$1,300,000
$1,600,000
$6,000,000
Indirect Costs
332,000
217,500
219,375
286,625
211,500
1,267,000
Totals
$1,432,000
$917,500
$1,519,375
$1,886,625
$1,511,000
$7,267,000

7. Distinction Between Direct And Indirect Costs
Direct Costs are for the sole benefit of a particular operating unit (department) and can be traced
while
Indirect Costs are for the benefit of the overall operation and not for any one unit (department). They have to be allocated.

8. Why the Difference Is Important to Management
The Manager is often responsible for the traceable expenses (Direct Expenses)
but
Is not responsible for the allocated expenses (the Indirect Expenses, or overhead).
Study the examples in the chapter closely.

9. Responsibility Centers
In a Responsibility Center the Manager is responsible for both the revenue/volume (inflow) side and the expense (outflow) side of a department, division, unit, or program.

10. Responsibility Centers
Responsibility Center information is especially important because the Manager is responsible for the operation.
Study the Westside Center example in the chapter carefully.

11. Distinction Between Product and Period Costs
Traditionally, Product Costs represent a product that has been manufactured and placed into inventory while waiting to be sold.
Then, when the product is sold, it is removed from inventory, matched with revenue, and recognized as a cost.

12. A Period Cost is not connected to the manufacturing process.
Distinction Between Product and Period Costs
A Period Cost is not connected to the manufacturing process.
Instead it is matched with revenue on the basis of what period the cost is incurred; thus “period” costs.*
* The term comes from the span of time in which matching occurs, known as a “time period”.

13. Distinction Between Product and Period Costs
Medical Supply and Pharmacy Departments have inventories on hand.
They use the Product Cost method, removing the item from inventory and then matching it with cost.

14. Distinction Between Product and Period Costs
Except for departments that carry inventories, however, health care is a service business.
One way to think of product costs in this instance is as necessary to the department, division, unit, etc. to deliver the service, while period costs are necessary to support the existence of the organization itself.