Cost Behavior and Allocation Essay

psychoanalyse the complexity of address demeanors in health care makeups and describe how cost are classified check to their relationship with volume. Health services managers are vit in ally interested in how cost are touch by changes in volume. Before costs can be managed, single moldiness(prenominal) have an sagacity of how and why costs are being incurred. For, warning medications dispensed from the pharmacy are varying costs items since the more often medications are dispensed to the patient, the higher to the quantity medication costs (Lang, 2012).In this example the cost is driven by the prescription of the medication for the patient, which leads to dispensing the medication and incurring the cost. If the medication is not impose the chalk up cost would be zero. The salary of the Director of the Pharmacy is a fixed cost, at least(prenominal) over the short run because that person is paid the same salary regardless of how many, or how few, prescriptions they fill . The textual matter defines the relationship between an organizations total costs and volume as cost behavior or underlying cost structure, is used by mangers in planning, control, and decision making.The primary reason for delimit and organizations underlying cost structure is to provide healthcare managers with a tool for prediction cost and profits at different volume levels (Gapenski, 2012). The cost structure of both fixed and variable costs- that is some of the costs are expected to be volume sensitive and some are not- is typical in healthcare organizations. Total variable costs increase or decrease proportionately as volume changes, but variable cost rate preserves constant as long as volume remains within the relevant range. Fixed, costs, in contrast to total variable costs, remain unvaried as the volume varies.The Academy of Healthcare Management Journal states, when attempting to improve profitability by fall or controlling costs, cost behavior is particularly imp ortant. If activities are limited or decreased to abase variable costs without consideration of fixed costs profits may actually decrease. In conclusion, total costs are merely the sum of the two. Because total variable costs are tied to volume, total variable costs increase as the volume increases even though fixed costs remain constant. Discuss the importance of cost allocation and how it may be leveraged by health care organizations. approach allocation is essentially a pricing process within the organization whereby managers allocate the costs of one department to other departments. Cost allocations within healthcare organizations must establish prices that proxy those that would be flock under market conditions. Costs within a health services organization must be allocated. Overhead costs of the business, such as those incurred by administrators, facilities management force-out, financial staffs, and housekeeping and maintenance personnel must be allocated to those departmen ts that generate revenues for the organization (Gapenski, 2012).The goal of cost allocation is to seize all of the costs of an organization to the activities that cause them to be incurred. Health services managers track and assign costs by man-to-man patient, physician, diagnosis, reimbursement contract, and so on. Much of the motivation for more accurate cost allocation systems comes from the recipients of belt services. Mangers at all levels within health services organizations are under pressure to optimize economic performance, which translates into reducing costs.To assign costs from one activity to another, two important elements must be identified a cost pool and a cost driver. A cost pool is a grouping of costs that must be allocated, while a cost driver is the criterion upon which the allocation is made. Clearly, the proper allocation of overhead costs is essential to good decision making within health services organizations. In conclusion, revenues must exceed the tota l of both fixed costs and variable costs combines in order for an organization to be profitable.