Provider Cost Finding Methods

Chapter 12

Learning Objectives

• Identify three methods to estimate costs

• Calculate costs using a step down method

• Calculate costs using an activity based method

• Understand the major advantages and disadvantages of activity based costing

Cost to Charge Ratio (CCR)

• Common method used by dentists and physicians

• An assumed relationship of cost to charges usuallydetermined by industry norms

• An advantage is simplicity

• Disadvantages- typical of industry may not apply to wholeorganization, CCR may be inaccurate

Step Down Method

• A cost finding method based on allocating costs that are notdirectly paid for (indirect costs) to products or services thatare directly paid for(direct costs)

• 4 steps used to allocate utilities, administration andlaboratory costs

• Fully allocated cost-Cost of a cost object that includes bothits direct costs and all other costs allocated

Cost allocation: Example

Solution:

Activity Based Costing (ABC)• Method of estimating the costs of a service or product by

measuring the costs of the activities it takes to produce thatservice or product

• Top–down approach

• Because it begins with all the costs and allocates themdownward into various services for which payment will bereceived.

• Bottom up approach

• It finds the cost of each service at the lowest level, the pointat which resources are used and aggregates them upwardinto products

Cost Terminology

• Direct Costs-Costs that an organization can trace to a cost object

• Indirect costs-Costs that cannot be traced to a particular cost object

• Cost Driver- Things that cause a change in the cost of an activity

Summary

• Must be able to measure costs accurately

• 3 approaches

• Cost to Charge Ratio (CCR)

• Step Down Method

• Activity Based Costing