Question

Describe the various ways in which cost can be allocated in healthcare operations. Why are costing techniques difficult to implement?

Answer 1

Ans) Goal of Cost Allocation:

- Assigns the costs of support activities to the revenue producing departments.
(This enables the department's ability to improve cost allocation systems and optimize economic performance within health services organization and the resultant managerial incentive systems which focus on financial performance.)

3 primary methods of cost allocation:

Direct
Reciprocal
Step-down

1) Direct cost allocation:

- Recognizes no intrasupport-department services
- Support department costs are allocated exclusively to patient services departments

2) Reciprocal cost allocation:

- Recognizes all intrasupport- department services
- Difficult to implement
- All costs eventually end up in patient services departments

3) Step-down cost allocation:

- Recognizes some intrasupport- department services
comprise
- All costs eventually end up in patient services departments

Steps in the Cost allocation process:

Step 1 Establish cost pool
Step 2 Identify the most effective cost driver
Step 3 Allocation Rate is established
Step 4 Make the allocation to each department.