Question 1.

If revenues are $6000, fixed costs are $2000, and profit is $1000, how much is variable cost?

Remember: Revenue minus fixed costs minus variable costs = profit

, Cost, cost,

R FC VC = P

R FC = P + VC

R FC P = VC

Question 2.

Assuming revenue per procedure is $200, fixed costs are $400,000 and a variable cost per procedure is $100, what is break-even volume?

Use this equation: Revenue minus variable costs = Fixed costs

Why? With this equation, the profit = zero, which is true at the breakeven point.

, Cost, cost,

($200 x V) ($100 x V) - $400,000 = $0

V= ___________

Question 3.

Using the direct method of allocation, assume an overhead department has $200,000 in expenses, there are two revenue producing departments, Dept. A and Dept B, and costs are allocated based on number of patient visits. Dept A has 6,000 visits and Dept B has 4,000 visits.

How much of the overhead department expense is allocated to Dept. A?

The costs allocated based on the number of patient visits (cost driver), Department ___ will incur the greater portion of the cost allocation.

Department A will be allocated $_________ in expenses,

Department B will be allocated the remaining $_______.

Dividing the overhead cost by the patient visit rate. That is overhead by patient visit rate for each department.

	Number of Patient Visits	Patient Visit Rate ($200,000/10,000)	Allocation (# visits x visit rate)
Department A	6,000	$20
Department B	4,000	$20
Totals	10,000		$200,000

Question 4. P.194

Assume you are starting a new service with the following relevant data. What must your price per procedure be in order to make $12,000 in profit?

Variable cost per procedure $16 Fixed Costs $20,000 Overhead Allocation $5,000 Expected procedure volume $5,000

Total costs add up to $105,000.

To make a profit of $12,000

Volume (5,000*X[where X is the variable cost per procedure to achieve a $12,000 Profit

Volume = (5,000 x $16 variable cost per procedure) = $80,000

Variable cost per procedure -------- $16 Revenue = Price x Volume

Fixed costs ----------------------------- $20,000 Price = Revenue/Volume

Overhead allocation ------------------ $5,000 = $117,000/5,000

Expected procedure volume ------- 5,000 =

Total costs add up to ----------------- $105,000

To make a profit of ------------------- $12,000 Volume (5,000*X) = $117,000

Question 5.

Your clinic has fixed costs of $1,000,000, an average variable cost of $16 per visit, one contract with a HMO where you are paid on a capitated basis. Your contract pays you $15 per member per month and you have 14,000 members. Each member comes into the clinic 2 times per year. How much money are you making (losing)?

The total cost is the fixed cost of $1,000,000 + $448,000 ($16 per visit, 14,000 members, 2 visits per year.

Question 5. Your clinic has fixed costs of $1,000,000, an average variable cost of $16 per visit, one contract with a HMO where you are paid on a capitated basis. Your contract pays you $15 per member per month and you have 14,000 members. Each member comes into the clinic 2 times per year. How much money are you making (losing)? P 172

The total cost is the fixed cost of $1,000,000 + $448,000 ($16 per visit, 14,000 members, 2 visits per year).

Variable cost: $16 x (14,000 x 2) = $448,000

Total costs = Fixed costs + Variable costs

= $1,000,000 + $448,000

= $1,448,000

Capitation: fixed revenue, on a PPM, per member, per month basis

Total revenue is ________ (contract pays $15 per member per month (regardless of visits)

$15 per visits on different months.

Total Revenue: $15 per member x 14,000 members x 12 months (regardless of # of visits: 2 visits per year is irrelevant)

Volume (per member per month fees) = 14,000 x 12 = _______

Revenue = Price x Volume

= $15 x 168,000

= _________________

Profit = Revenue Costs

Capitation: fixed revenue, on a PPM, per member, per month basis

Total Revenue: $15 per member x 14,000 members

Total Cost: $1,000,000 + $448,000

Variable cost: $16 x 14,000 x 2 = $448,000 Total costs = Fixed costs + Variable costs

= $1,000,000 + $448,000 = $1,448,000

Profit

Total revenue:. Variable costs:. Total costs:

Profit = Revenue Costs

Question 6.

What is the name given to the budget that starts every budgeting cycle with a clean slate?

___________ ( in contrast with incremental budgeting, based on last years budget).

Question 7

A dedicated full-time nurse working exclusively to support a physician in his office is an example of which type of an expense?

Fixed or Variable? Direct or Indirect?.

Because the nurse works exclusively to support the physician in is his office and is not shared by the entire organization this is an example of a ________ cost. The cost of employing the nurse is unique and exclusive to the physician. This expense is also _____ because the cost to employee the nurse is independent of the volume of patients.

Question 8

Describe how the following three requirements are essential in allocating costs.

Accounting system

cost allocation

Cost center:

Workload statistic / cost driver, basis on which a cost pool is allocated. Give an example

Question 9.

Briefly describe how these three cost allocation methods are different.

Direct, Step-down and Double.

Question 10

Research in the Book or Online Marginal, Incremental Costing

How is differential costing (alternative terms include: incremental, marginal) costing useful when most of the data elements and assumptions are the same for two alternative products and services? Give an example

Question 11

Explain how the RCC (ratio of costs to charges) costing method is different from the process costing, job-order costing, and activity-based costing methods.

Question 12.

Identify three requirements for appropriate overhead cost drivers.

In slides

Question 13.

Give several examples of cross-subsidization (corrected from cost-subsidization, which was meant to describe the same practice)

Question 14.

Why are volume estimates (from the Statistics Budget) essential as the first requirement in budgeting?

Volume estimates are essential because

Question 15.

How are flexible budgets created and managed?

Flexible budgets take the cost, price, etc. assumptions in the original budget and adjust for the actual volume.