Fixed and Variable Costs

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Health services managers are essentially interested in how costs are affected by changes in volume. Cost behavior refers to a cost 's reactions to activity level. A cost may rise, fall, or remain constant as activity levels fluctuate. We can classify several types of costs on the basis of their relationship to the amount of services provided, often referred to as activity, utilization, or volume (Gapenski, 2012). When dealing with the future there is a level of uncertainty of volume with regard to inpatient days, number of emergency visits, number of unforeseen complications, number of additional unaccounted for testing procedures and so on. The many costs incurred by the healthcare organization can be classified as variable, fixed, or…show more content…
Variable costs apply at a per unit basis, only the behavior of the variable per unit cost is different. For example, if supplies for a one lab test cost $10, the variable cost per test remains constant. Although the cost of the test remains the same, the total costs associated with the test will increase or decrease in relation with the volume of tests at the hospital. Cost behavior refers to the relationship between a given cost item and the quantity of it 's related cost driver. It explains how the total amount for various costs respond to changes in volume. When volume is zero, variable costs equal zero. If there are no lab tests being performed, there are no variable costs incurred. Fixed costs on the other hand do not change in response to a change in volume. The monthly cost to rent a clinic would stay constant whether they had 50 or 100 lab tests, because that is a fixed cost.
Cost Allocation Cost allocation is essentially a pricing process within the organization whereby managers allocate the costs of one department to other departments. Typically, the overhead costs of the healthcare business, such as those incurred by administrators, facilities management personnel, financial staff, housekeeping and maintenance personnel, must be allocated to those departments that generate revenues for the organization. Departments that generate revenues are generally patient services (Gapenski,
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