Christina Jud

HPA 14
Due October 28th

PLANNING, MANAGING AND CONTROL

Focus on pages 97 through 103
Chapter 4 Page 112, 113 Carefully review and understand KEY CONCEPTS ; review the
CRITICAL CONCEPTS in Chapter 4
Page 113 End of Chapter Questions 4.1, 4.2 a.,b., 4.3, 4.4, 4.5, 4.6 a.,b.,c.

4.1 Explain the difference between fixed and variable costs.

Fixed costs are those that don’t change. They include both direct and indirect costs. Variable
costs usually only include direct costs. Variable costs also change when volume increases or
decreases.

4.2 a. What is meant by a business’s underlying cost structure?

A business’s underlying cost structure has the formula (total costs= fixed costs + total variable
costs). It is the relationship between cost and volume. It is used by managers in order to make
decisions, plan, and maintain control over the business.

b. Why is this information valuable to managers?

This is useful because it gives managers a tool used for forecasting costs at different volume
ranges.

4.3 What cost structure creates economies of scale? Why?

The cost structure that creates economies of scale is the variable cost. These costs change based
on volume which is why they create the economies.

4.4 What are the primary differences between direct and indirect (overhead) costs?
Direct costs are those that only consist of a portion of the laboratory’s total costs. The resources
that are left over are those that are not unique to the laboratory. Indirect costs are different
because they are harder to measure at a department level. This is due to the fact that they come
about from shared resources. That being said, if a laboratory was closed, the indirect costs
would not just disappear. They may reduce, but they would not fully go away. The relevance of
direct versus indirect is only worth noting at the subunit level. When considering the entire
organization, all costs are direct.

4.5 What is the goal of cost allocation?

The goal of cost allocation is to take all of the costs of an organization and assign them to
activities that will cause them to be incurred.

4.6 a. What is a cost pool?

A cost pool is a group of costs that are allocated to patient service departments. They usually are
comprised of all of the direct costs of an overhead department. An example of this would be
costs that are associated with the housekeeping department. However, if there are different
services offered, those costs may be split into multiple cost pools. This is the first step in
allocating costs.

b. What is a cost driver?

A cost driver is the basis for allocating the cost pool. A good cost driver is when there is a very
accurate cause and effect relationship shown between services and the cost of those services.

c. How is the cost allocation rate determined?

These prices must be set based on prices that would be set under market conditions. This is
because this does not take place in a market place setting, therefore, prices must be similar to
those in a market place setting because there are no observable prices for the transferred
services.