MANAGEMENT ACCOUNTING IN HEALTH CARE ORGANIZATIONSdownload.e-bookshelf.de/download/0000/5870/99/L-G-0000587099... · Management accounting in health care organizations / David W

DAVID W. YOUNG

MANAGEMENT ACCOUNTINGIN

HEALTH CARE ORGANIZATIONS

Young_FM_rev.qxd 8/16/03 11:32 AM Page v

Innodata0787972932.jpg

Young_FM_rev.qxd 8/16/03 11:32 AM Page i

Young_FM_rev.qxd 8/16/03 11:32 AM Page ii



Young_FM_rev.qxd 8/16/03 11:32 AM Page iii

Young_FM_rev.qxd 8/16/03 11:32 AM Page iv

DAVID W. YOUNG




Copyright 2003 by Jossey-Bass

Published by Jossey-BassA Wiley Imprint989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permittedunder Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permis-sion of the Publisher, or authorization through payment of the appropriate per-copy fee to the CopyrightClearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or

Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011,fax 201-748-6008, e-mail: [email protected].

Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly callour Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986 or fax317-572-4002.

Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books.

Library of Congress Cataloging-in-Publication Data

Management accounting in health care organizations / David W. Youngp. cm.

Includes bibliographical references and index.ISBN 0-7879-6745-9

1. Public healthUnited States. 2. Health policyUnited States 3. Accounting I. Young, David W.

RA440.87.U6 T627 2002362.1'0973dc21 2002035657

FIRST EDITION

PB Printing 10 9 8 7 6 5 4 3 2 1

Young_FM_rev.qxd 8/16/03 11:32 AM Page vi

on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the

http://www.josseybass.comhttp://www.copyright.com

vii

Table of Contents

List of Exhibits xv

Preface xvii

Acknowledgments xxv

The Author xxvii

1 Essentials of Full Cost Accounting 1

Organization of the Chapter 2

Uses of Cost Information 2Pricing Decisions 2

Profitability Assessments 4

Comparative Analyses 4

Issues to Consider in Calculating Costs 5

Resource Usage: A Conceptual Framework 6The Labor Resource 6

The Capital Resource 6

Units of Measure 8

Limitations 8

Cost Drivers 8

The Cost Accounting Methodology 10Decision 1: Defining the Cost Object 10

Decision 2: Determining Cost Centers 11

Decision 3: Distinguishing Between Direct and Indirect Costs 14

Decision 4: Choosing Allocation Bases for Service Center Costs 16

Decision 5: Selecting an Allocation Method 21

Decision 6: Attaching Costs to Cost Objects 24

Effect of the Cost Accounting Methodology on PricingDecisions 25

Defining the Cost Object 25

Choosing Cost Centers 25

Determining the Impact on Customer Prices 27

Young_FM_rev.qxd 8/16/03 11:32 AM Page vii

Full Cost Accounting and Third-Party Reimbursement 28

Summary of Cost Accounting Choices 29

Two Reminders 29

Appendix: The Reciprocal Method of Cost Allocation 30

Practice Case: Mossy Bog Laboratories 32

Case 1-1: Riverview Community Health Clinic 33

Case 1-2: Harbor City Community Center 34

Case 1-3: Carroll University Hospital 38

Case 1-4: Central Valley Primary Care Associates 50

2 Differential Cost Accounting 57


The Nature of Costs 58Fixed Costs 59

Step-Function Costs 59

Variable Costs 60

Semivariable Costs 60

Estimating Cost-Volume Relationships 60

Relation of Cost Behavior to Full Cost Accounting 61

Cost Behavior in Organizations 62

Differential Costs 64Principle 1: Full-Cost Information Can Be Misleading 65

Principle 2: Differential Costs Can Include Both Fixed and Variable Costs 65

Principle 3: Assumptions Are Needed 66

Principle 4: Causality Is Needed 66

Principle 5: Sensitivity Analysis Can Be Helpful 67

Principle 6: Information Must Be Structured Appropriately 67

Contribution 67

Sunk Costs 69Sunk Costs and Intuition 69

Sunk Costs in Organizational Settings 70

Nonquantitative Considerations 78

TABLE OF CONTENTSviii

Young_FM_rev.qxd 8/16/03 11:32 AM Page viii

Allocated Overhead 79Misleading Allocation Bases 79

Effects of the Step-Down Sequence 80

The Analytical Effort 81

Cost-Volume-Profit Analysis 82Unit Contribution Margin 84

Incorporating Other Variables into CVP Analysis 85

Profit Considerations 85

Special Considerations in CVP Analysis 85CVP Analysis with Semivariable Costs 85

CVP Analysis with Step-Function Costs 86

CVP Analysis with Multiple Products or Services 87

The Impact of Product Mix 88

Reminder 91

Practice Case: Narcolarm, Inc. 91

Case 2-1: Huntington Hospital 93

Case 2-2: Carlsbad Home Care 94

Case 2-3: Springfield Visiting Nurse Association 96

Case 2-4: Abbington Health Center 97

Case 2-5: Lakeside Hospital 100

Case 2-6: Boston University Medical Center Hospital 105

3 Absorption Costing 115


Health Cares Second-Stage Dilemma 116The Ratio of Costs to Charges 117

Solving the Problem 119

A Functional Classification of Manufacturing Costs 120Direct Manufacturing Costs 120

Indirect Manufacturing Costs 120

Conversion Costs 122

Full Production Cost 122

Selling Costs and Administrative and General Costs 122

TABLE OF CONTENTS ix

Young_FM_rev.qxd 8/16/03 11:32 AM Page ix

Period and Product Costs 123

Applicability to Health Care 123

Some Terminology Cautions 123

Computing Cost of Goods Sold 124Job Order System 124

Process System 126

Unit Costs 126

Inventory Cost and Cost of Goods Sold 126

The Overhead Rate 127The Basis 127

The Computation 128

Predetermined Overhead Rates 128

Overhead Variances 131Flexible Overhead Budgets 131

Calculation Steps 136

Terminology Issues 139

Accounting Implications of an Overhead Variance 140

Managerial Uses of Overhead Variances 140

Reminder 140

Practice Case: Crimson Chair Company 142

Case 3-1: Owen Hospital (A) 146

Case 3-2: Neighborhood Services (A) 148

Case 3-3: Huron Joint Company 151

Case 3-4: Atherton Medical Education Programs 156

Case 3-5: University of Miami Department of Medicine 176

4 Activity-Based Costing and Variable Costing 199


Activity-Based Costing 200Conditions for ABC 202

Establishing Multiple Second-Stage Cost Drivers 203

A General Approach 206

TABLE OF CONTENTSx

Young_FM_rev.qxd 8/16/03 11:32 AM Page x

Cost Drivers in Other Health Care Settings 208

Absorption Costing Versus Variable Costing 210Applicability to Health Care 210

Key Difference 210

Reasons for Difference 218

Product Costs Versus Production Overhead Variances 218

Advantages of Variable Costing 219

Implications for Just-in-Time (JIT) Manufacturing Environments 219

Disadvantages of Variable Costing 220

Two Reminders 221

Practice Case: Lincoln Dietary Department 221

Case 4-1: Owen Hospital (B) 223

Case 4-2: Neighborhood Servings (B) 228

Case 4-3: Cortland Manufacturing, Inc. 232

Case 4-4: Landau Company 235

5 Responsibility Accounting: An Overview 239


Cost Accounting and Responsibility Accounting 240

Responsibility Accounting Systems Defined 241

The Responsibility Accounting Structure 244Types of Responsibility Centers 244

An Example 247

Design of Responsibility Centers 249

The Responsibility Accounting Structure and Motivation 252

Transfer Prices 252

The Management Control Process 255Programming 256

Budgeting 258

Operating and Measuring 260

Reporting and Evaluating 261

TABLE OF CONTENTS xi

Young_FM_rev.qxd 8/16/03 11:32 AM Page xi

Summary: Making Profit Centers Work 263Issue 1: Degree of Influence 263

Issue 2: Absence of Dysfunctional Incentives 263

Issue 3: Use of Transfer Prices 264

Issue 4: To Cross-Subsidize or Not 264

Design Complications 265

Matrix Organizations 266

A Contingency Approach 269

Two Reminders 269

Practice Case: Valley Hospital 270

Case 5-1: White Hills Medical Center 272

Case 5-2: Converse Health System 274

Case 5-3: Franklin Health Associates (A) 285

Case 5-4: Lomita Hospital (A) 295

6 Programming and Budgeting 305


Capital Budgeting 306Capital Investment Decision Making 306

Effect of Taxes 307

Effect of Accelerated Depreciation 312

Choosing the Discount Rate 314

Incorporating Risk 317

Political and Behavioral Considerations 318

Quantifying the Value of a Human Being 318

Operational Budgeting 319The Context for Budgeting 319

Formulating the Budget: Behavioral Aspects 322

Formulating the Budget: Mechanical Aspects 323

Budget Monitoring 330

Budgeting Misfits 331Misfit 1: Between the Cost Structure and the Budget Structure 331

Misfit 2: Between the Cost Structure and Budget Monitoring Results 331

Misfit 3: Between Strategic Success Factors and the Budget Process 332

Misfit 4: Between the Organizational Structure and the Budget Process 332

TABLE OF CONTENTSxii

Young_FM_rev.qxd 8/16/03 11:32 AM Page xii

Misfit 5: Between Strategic Objectives and the Budget Process 333

Misfit 6: Between Motivation Systems and the Management Control Process 334

Misfit 7: Between the Budget Formulating and Budget Monitoring Phases 335

Toward More Effective Budgeting 335

Two Reminders 336

Appendix: The Concept of Present Value 337

Practice Case A: Erie Hospital 341

Practice Case B: Los Reyes Hospital (A) 343

Case 6-1: Yoland Research Institute 345

Case 6-2: Green Valley Medical Center 348

Case 6-3: Bandon Medical Associates (A) 357

Case 6-4: North Lake Medical Center 360

Case 6-5: Rush-Presbyterian-St. Lukes Medical Center 372

7 Measuring and Reporting 393


The Measuring Phase 394

Aligning Responsibility with Control 394

Measuring and Reporting Techniques 396Flexible Budgeting 396

Variance Analysis 397

A Graphic Illustration 398

Calculating Variances 400

The Reporting Process 406Timeliness 406

Hierarchy of Information 407

Relevance and Accuracy 412

Behavioral Factors 412

Measuring and Reporting Nonfinancial Information 416Criteria for Good Nonfinancial Reports 417

Two Examples 419

Linking Nonfinancial to Financial Performance 421

TABLE OF CONTENTS xiii

Young_FM_rev.qxd 8/16/03 11:32 AM Page xiii

Criteria for a Good Responsibility Accounting System 422Structural Criteria 422

Process Criteria 423

Behavioral Criteria 423

Reminder 424

Appendix: Developing a Spidergram 425

Practice Case: Oak Street Nursing Home 427

Case 7-1: Bandon Medical Associates (B) 427

Case 7-2: Los Reyes Hospital (B) 434

Case 7-3: Lomita Hospital (B) 439

Case 7-4: Franklin Health Associates (B) 444

Case 7-5: Union Medical Center 448

8 Implementing a New Responsibility Accounting System 459

Key Characteristics of a Good Responsibility Accounting System 459

The Responsibility Accounting Context 461

Managing the Change Effort 462Resistance to the Change Effort 463

Short-Term Wins 468

Consolidating and Moving Forward 468

Case 8-1: The Robert Wood Johnson Medical School 470

Case 8-2: Southern State University Health System 487

Case 8-3: Hillside Hospital 501

Case 8-4: Fletcher Allen Health Care 510

Appendix: Solutions to Practice Cases 535Glossary of Selected Terms and Concepts 563Index 569

TABLE OF CONTENTSxiv

Young_FM_rev.qxd 8/16/03 11:32 AM Page xiv

List of Exhibits

PrefaceLearning Objectives for This Book xviii

Chapter 11-1 Learning Objectives 21-2 Resource Usage: A Conceptual Framework 71-3 Examples of Cost Drivers in a Hospital 91-4 The Step-Down Method 23A1-1 Basic Information for a Reciprocal Cost Allocation 30A1-2 Allocation of Service Center Costs to Mission Centers 31

Chapter 22-1 Learning Objectives 582-2 Types of Cost Behavior 592-3 Fixed and Variable Costs Versus Mission and Service

Center Costs 612-4 Contribution Income Statement for Clearwater Ambulance

Service 68

Chapter 33-1 Learning Objectives 1163-2 Manufacturing Cost Terminology 1213-3 Job Ticket for Buzzard Glen Hospital 1253-4 Summary of Manufacturing Overhead (MOH) Variance

Computations for Computex Company 1353-5 Overapplied and Underapplied Overhead (or Overabsorbed and

Underabsorbed Overhead) 140

Chapter 44-1 Learning Objectives 2014-2 Absorption Costing Versus Variable Costing 2114-3 Production, Sales, and Income Relationships: Absorption Versus

Variable Costing 219

xv

Young_FM_rev.qxd 8/16/03 11:32 AM Page xv

Chapter 55-1 Learning Objectives 2405-2 Management Accounting Information: A Summary 2425-3 Types of Responsibility Centers 2455-4 Organizational Structure of Richardson Health Institute 2485-5 Phases of the Management Control Process 2575-6 A Typical Matrix Structure 2665-7 Matrix Structure in a Large State Agency 268

Chapter 66-1 Learning Objectives 3066-2 Budgeting in Context 3206-3 Organizational Structure of Northeast Prosthetics 3256-4 Variable Budget, by Product (or Service) Line 3266-5 Master Division Budget 328A6-1 Present Value Tables 339

Chapter 77-1 Learning Objectives 3947-2 Different Costs for Different Purposes 3957-3 Types of Variances and Controlling Agents 4057-4 Reporting Hierarchy for an Integrated Delivery System 4087-5 Reporting Hierarchy for a Department of Mental Health:

Program Analysis 4107-6 Reporting Hierarchy for Spenser Rehabilitation Hospital,

June 2002 4137-7 Measures of Nonfinancial Performance 4177-8 Program Performance Report Framework: Commonwealth

Medical School 4207-9 Example of a Spidergram 422A7-1 Spidergram Worksheet 426

Chapter 88-1 Learning Objectives 4608-2 Cross-Functional Processes in an Organization 4638-3 Questions Concerning Cross-Functional Processes 4648-4 Eight Steps to Change 4668-5 Commitment to Change 4668-6 Methods of Dealing with Resistance to Change 4678-7 Impact Versus Difficulty 4688-8 Players, Status, and Action Plan Worksheet 469

LIST OF EXHIBITSxvi

Young_FM_rev.qxd 8/16/03 11:32 AM Page xvi

xvii

Preface

This book is designed to provide an introductory level of instruction to students ofhealth care management who are studying management accounting for the first time.It offers a user-oriented approach to management accounting concepts and techniquesthat will help individuals prepare for work in an environment where an understand-ing of management accounting is important to success.

Management accounting is concerned primarily with the information needs ofan organizations managers. In general these needs arise in three areas: full costaccounting, differential cost accounting, and responsibility accounting. Exhibit 1 onthe next page lists this books specific learning objectives in each of these three areas.

TO THE STUDENTThe working assumption of this book is that readers have no prior knowledge of man-agement accounting. Students completing the book successfully will be knowledge-able about both the uses and the limitations of management accounting information.To accomplish this, the book places minimal emphasis on the technical aspects ofpreparing accounting information, covering only those technical matters that areessential to understanding the information. Most of the material focuses on the mean-ing and utility of accounting information for managers and other users.

In general the learning process consists of developing new skills, which can beacquired only by practice. Learning management accounting is a bit like learningabout a new city. If someone takes you on drives around the city, you will probablylearn very little about where landmarks are located and how to get from one placeto another. If you drive by yourself, however, you will learn a great deal about thecitytaking in far more on a single trip than you would learn in dozens of trips as apassenger.

In this book you are the driver rather than the passenger. You will practice (andlearn) accounting while you read each chapter, rather than after you finish it. You willhave opportunities to prepare answers to management accounting problems thatappear throughout each chapter and to analyze one or more practice case studies atthe end of the chapter.

Minimal MemorizationMastering management accounting requires learning some analytical techniques thatbuild on each other. Although most students find management accounting intuitivelyunderstandable, the material cannot be learned by thinking deep thoughts, so thisbook guides you as you work with the concepts and techniques so you can see how

Young_FM_rev.qxd 8/16/03 11:32 AM Page xvii

xviii

they are developed and applied. The discussion in each chapter assumes that youunderstand the material covered in the prior chapters, so it is important to workthrough the chapters in order.

Interactive LearningAs mentioned, a distinctive feature of this book is its interactive approach to the learn-ing process. You are regularly asked to stop reading and work out the solution to aproblem, a situation derived from the experiences of real organizations.

To make this interactive learning process work well for you, remember that youare the driver for this process, and you must stay in the drivers seat at all times.Answer each problem to the best of your ability before looking at the answer providedin the text, and analyze each practice case thoroughly before looking at a solution.

PREFACE

Full Cost Accounting

The meaning of such terms as costobject, cost center, direct and indirectcosts, overhead, cost allocation meth-ods, and cost systems

The way costs can be allocated todetermine the cost of a particularproduct or service

The distinction between production(or mission) centers and service cen-ters

The nature of the managerialchoices inherent in a full costaccounting system

The distinction between overheadrates and overhead variances,including predetermined overheadrates

The distinction between absorptioncosting and variable costing

The concepts of activity-based cost-ing (ABC) and cost drivers, includ-ing second-stage cost drivers

Differential Cost Accounting

The rationale for the statement dif-ferent costs are used for differentpurposes

The distinction between full costsand differential costs, and when eachshould be used

The nature of the factors that influ-ence changes in cost, including thedistinctions among fixed, variable,step-function, and semivariable costs

The nature of alternative choicedecision making, and the threemajor types of alternative choicedecisions that most organizationsmake

The concepts of unit contributionmargin and total contribution, andtheir roles in alternative choicedecision making

The technique of cost-volume-profitanalysis, how to prepare such ananalysis, and its uses and limitations

Responsibility Accounting

The definition of a responsibilitycenter, the different responsibilitycenter options, and the basis forchoosing the most appropriate typeof center

The definition of a transfer price,and the role of transfer prices in amanagement control system

The phases of the management con-trol process, and the characteristicsof each phase

The key elements in the budget for-mulation process, and the relation-ship between budgeting andresponsibility centers

The meaning of the term flexiblebudget, and the use of this budget ina management control system

The technique of variance analysis,the different types of variances thatcan occur, the uses and limitationsof variance analysis, and the rela-tionship between variance analysisand management reporting

Some of the issues involved in mea-suring nonfinancial (or program)performance

Exhibit 1 Learning Objectives for This Book

Upon completing this book, you should know

Young_FM_rev.qxd 8/16/03 11:32 AM Page xviii

Shortcutting this learning process will put you back in the passengers seat, observingmore than learning.

The reasoning in a provided answer can be quite seductive. If you look at a pro-vided solution before working out your own answer, you will generally find yourselfin agreement with it, saying something like, Thats how I would have done it if I haddone it. But you will be unlikely to have learned why it is so obviously the rightanswer. Actually working through a problem, arriving at a solution, and then com-paring it to the provided solution will give you an understanding of the logic behindthe accounting concept at issue and allow you to apply that concept successfully toreal-life problems later.

In short, to learn management accounting, you must struggle through the processof arriving at solutions yourself, gaining understanding from both your successes andyour mistakes. Prepare for this learning process by having a pencil, a calculator, anda supply of paper (for making calculations and writing out your answers) next to youwhile you are reading each chapter. A problem begins with a line across the page, likethe one that follows.

Problem The problem statement is indicated with a pencil icon, as shownhere. It is followed by another line, as shown below.

Answer The answer to the problem, in a sans serif typeface, immediately fol-lows this second line and ends with a third line.

Use a sheet of blank paper to cover the answer as you work out the solution toeach problem. Prepare your solution neatly enough that you can compare it and yourassociated reasoning to the answer provided. If your comparison shows that your solu-tion is right, continue reading. If you have an incorrect answer, spend as much timeas you need to figure out where you went wrong. This may require rereading the sec-tion of the chapter immediately preceding the problem.

Short ChaptersThe chapters in this book are relatively short so that you can take your time readingthem and working your way through their interactive portions. Completing a chaptercould take several hours, so its normal to feel that you are working slowly.

You should not try to cram the learning process into less time, because you needto digest the material as you go along. If you believe you already understand the mate-rial in a particular section and therefore do not need to read that section, prepare solu-tions to the problems in the section to verify your understanding.

Practice Case StudiesIn addition to solving the problems contained in the body of each chapter, you willalso be asked to prepare an analysis of one or more practice case studies at the end ofeach chapter. Solutions to these practice cases are contained in the Appendix at theend of the book.

xixPREFACE

Young_FM_rev.qxd 8/16/03 11:32 AM Page xix

As with the problems, you should attempt to analyze the practice cases to the bestof your ability before looking at the solutions. Each case covers some of the conceptsdiscussed in the chapter and thus will give you an opportunity to test your knowledgeof the chapters content.

In short, engaging in the interactive activities in each chapter is a critical aspectof the learning process. Assimilating the material thoroughly is key to avoiding frus-tration with the concepts of management accounting. Thus, when you are asked towrite out an answer to a problem, take the time to do so before reading further. Youwill occasionally be tempted to shortcut this feature of the book; please do not suc-cumb to temptation.

TO THE STUDENT AND THE INSTRUCTORThis is a nontraditional text in five important respects: user orientation, interactivelearning process, length, organizational focus, and emphasis on the case method ofinstruction.

User OrientationThis book, overall, presents a practical, user orientation; however, accounting detailsare discussed to the extent the reader needs them to understand the concepts and tech-niques used in most organizations. In general the text does not cover exceptions to therules or some of the possible variations on each traditional theme. Of course theinstructor may discuss these matters in class if he or she wishes to do so, supple-menting the text, where necessary, with additional readings or exercises.

Interactive Learning ProcessThe idea behind the problems students are asked to solve in each chapter is to shortenthe feedback loops in the learning process. Rather than answering questions or analyz-ing problems only at the end of each chapter, students can apply what they have learnedabout a topic immediately following the discussion of that topic. When the discussionof a topic is lengthy, problems may be presented during that discussion as well.

Some students may be tempted to shortcut this process, especially toward the endof the course. The instructor may need to remind the class at regular intervals of theimportance of continuing the interactive learning process.

LengthThis book is only eight chapters long. It is well suited for a half-semester, graduate-levelcourse, where, on average, a single chapter can be covered in one week. Most of the chap-ters contain enough substance, however, that each could be covered at a more reason-able pace over two weeks, and thus the book is especially suitable for a one-semestercourse. Over a full semester, students will have more time to digest the material in eachchapter, and the instructor will be able to supplement the text with additional readings.

xx PREFACE

Young_FM_rev.qxd 8/16/03 11:32 AM Page xx

Organizational FocusMany texts use manufacturing examples to illustrate accounting concepts and prin-ciples. This book uses health care examples. Although most management accountingconcepts are universal and the type of organization used to illustrate a point is rela-tively unimportant, the learning process for health care students is much easier whenthe examples come from their area of interest. The examples have been chosen withthe hope that they will resonate with students because they deal with organizationswith which the students have some familiarity. The same is true of the problems inthe chapters and the practice cases at the ends of the chapters.

Case Method of InstructionIncreasingly, accounting educators are recognizing the importance of using the casemethod in the teaching of management accounting. Its value is that it puts students inthe middle of the action and requires them to be analyticalto apply principles ratherthan just memorize them. In this way it prepares students for work in a world whereanalysis, judgment, and attention to nuance increasingly are required for success.

The practice cases in this book are all quite short, and might even be thought ofas extended problems. The conventional distinction between an extended problemand a case is that a case usually presents a situation for which there is no single rightanswer. For most of these practice cases, there are right answers, although as studentswill see, there is sometimes more room for judgment than they might imagine ini-tially. Thus these cases that may seem at first to be extended problems frequently havesome of the flavor of more traditional cases.

Given the technology available in the workplace today, students need to becomeproficient in the use of microcomputers in general and spreadsheet packages in par-ticular. To this end, several practice cases are good candidates for a relatively simplespreadsheet analysis, and students should be encouraged to use spreadsheet softwarein preparing their analyses of these cases.

TO THE INSTRUCTORThis book has been written principally for use in a one-semester, user-oriented coursein management accounting, using the case method of instruction. Each chapter isdesigned to be covered in one to two weeks, ideally over four or five classes of 1.5 to2 hours each. Clearly, a great deal depends on the amount of depth that you wish topursue and how quickly or slowly you wish to move through the course.

The material in this book has also been used in a half-semester course on man-agement accounting for M.B.A. students. Here, each chapter was covered in about twoclass meetings of two hours each.

Students preparation for the first class session associated with a given chaptershould include reading the chapter, engaging in the interactive activities in the chap-ter, and analyzing the practice case(s) at the end of the chapter. Please bear in mindthat due to the interactivity, students will need considerably more time to read thesechapters than they would if they were using a more traditional text. Moreover, theywill also need to spend time analyzing the practice cases.

xxiPREFACE

Young_FM_rev.qxd 8/16/03 11:32 AM Page xxi

Given these factors it is sometimes useful to have an open class discussion fol-lowing the students reading of each chapter and preparation of the practice case(s).This discussion can serve to clarify the chapters concepts and to deal with any diffi-culties the students are having in using them.

After this class session, each remaining class for a given chapter can focus on acase study that requires students to use chapter concepts and techniques. This way,the concepts are first clarified and then used in the analysis of case situations. In gen-eral the cases at the end of each chapter progress from rather easy to somewhat diffi-cult. In some chapters the latter cases become quite complex and may require twoclass sessions for a full discussion.

If you wish help in selecting additional cases for your course, you may contactthe Crimson Press Curriculum Center (www.thecrimsongroup.net) and review itson-line catalogue of materials. The center also has a list of suggested cases for eachchapter. In addition, the Harvard Business School Press has a catalogue and a Website (www.hbsp.harvard.edu) that can help you in selecting additional cases to sup-plement each chapter.

ORGANIZATION OF THIS BOOKThe table of contents shows the major headings in each chapter. The overall themesfor each of the eight chapters are discussed briefly here.

Chapter One: Essentials of Full Cost AccountingThe question What did it cost? is one of the trickiest accounting questions for allorganizationsmanufacturing, service, and nonprofit. This chapter discusses thekinds of managerial decisions that are made in answering this question as well as themanagerial utility of full cost information. It also links the cost accounting effort tothe economists three factors of production: land, labor, and capital.

Chapter Two: Differential Cost AccountingThe notion that different costs are used for different purposes is frequently a difficultone for students to accept. This chapter explains why this notion is important, focus-ing in particular on the distinction between full costs and differential costs and on wheneach approach should be used. It also discusses cost behavior, including the distinctionsamong fixed, variable, step-function, and semivariable costs. Next, it explains how toundertake cost-volume-profit analyses and discusses the concept of contribution. Theideas discussed in this chapter are important for managers when they are making a widevariety of what are called alternative choice decisions; here, managers must analyze howcosts behave in each of two or more approaches to accomplishing a particular task.

Chapter Three: Absorption CostingThe discussion in Chapter One focuses principally on service organizations. ChapterThree looks at various types of costs that exist in a manufacturing setting, showinghow to compute the cost of goods manufactured and cost of goods sold with job orderand process systems. This chapter also discusses overhead rates, including predeter-

xxii PREFACE

Young_FM_rev.qxd 8/16/03 11:33 AM Page xxii

mined overhead rates, flexible overhead budgets, the computation of overhead vari-ances, and the managerial uses of overhead variances. The examples used feature lab-oratories and medical equipment manufacturersperhaps the only truemanufacturing entities in health care. Although most health care managers do not needto understand absorption costing for their day-to-day responsibilities, the material isincluded here for two reasons: first, some accountants working in the health care fieldhave a manufacturing background, and managers need to be comfortable with the ter-minology these accountants use; and second, the use of activity-based costing (ABC) isbecoming increasingly prevalent in health care, even though many users of ABC donot understand the kinds of problems it was designed to solve; managers who under-stand absorption costing will be better able to employ ABC appropriately.

Chapter Four: Activity-Based Costing and Variable CostingThis chapter first examines the role of activity-based costing, including second-stagecost drivers. Many organizations are turning to ABC as a way to both measure costsmore accurately and exert greater control over them. Thus this chapter also bridgesforward to the final four chapters. The chapter then looks at the distinction betweenabsorption costing and variable costing and discusses the advantages and disadvan-tages of each. Again, although absorption costing may not be especially relevant formost health care organizations, variable costing can be an extremely important toolfor many managers. It is not used much in health care currently, yet used appropri-ately it could be a powerful tool.

Chapter Five: Responsibility Accounting: An OverviewThere is an important distinction to be made between measuring resources and con-trolling resources. This chapter makes that distinction and moves into the realm ofresponsibility accounting. To design a good responsibility accounting system, a man-ager must think about the organizations management control system, in terms ofboth its structure and its process. The discussion here emphasizes structure, examin-ing the different types of responsibility centers that can exist in an organization, thebasis for choosing one type over another, and the relationship between the responsi-bility structure and managers incentives. The chapter also discusses transfer pricesand their role in a management control system. It concludes with a summary of thefour phases of the management control process.

Chapter Six: Programming and BudgetingBecause money can earn interest, a given sum of money received at some point in thefuture is worth less to an individual than that same sum received today. This conceptlies at the heart of capital budgeting, where an organization invests some money todayso as to receive some returns on that investment over a number of years in the future.This chapter discusses some of the techniques for analyzing investments using theconcept of present value. It also looks at the effect of taxes and accelerated deprecia-tion on a capital investment decision, examines the issues involved in choosing a dis-count rate for assessing a capital project, and assesses the impact of political and

xxiiiPREFACE

Young_FM_rev.qxd 8/16/03 11:33 AM Page xxiii

xxiv

behavioral considerations on the choice of capital projects. (Although the issue oftaxes and accelerated depreciation may seem unimportant to students planning towork in a nonprofit environment, some of these students are likely to spend at leasta portion of their careers in the for-profit sector of the health care field, and knowl-edge of these matters will be important to their success there.)

The chapter then discusses operational budgeting, the process that focuses onoperating revenues and expenses and that is typically carried out annually in an orga-nization. Among the topics addressed are the key elements in the budget process, andthe relationship between budgeting and responsibility centers, the meaning of theterm flexible budget and the budgets role in a management control system, the orga-nizational and strategic contexts in which budgeting takes place, the mechanicalaspects of building a budget, and seven common budgeting misfits.

Chapter Seven: Measuring and ReportingTwo important phases in the management control process involve measurement ofperformance and the reporting of that information to managers. This chapter dis-cusses these phases, placing particular emphasis on variance analysis, a technique thatallows managers to see with some clarity the reasons underlying a difference betweenbudgeted and actual revenues and expenses. The chapter also addresses an emergingconcern of many health care organizationsthe measurement of nonfinancial per-formance. Among the specific topics discussed in the chapter are the role of a flexi-ble budget in a management control system, the uses and limitations of varianceanalysis, the relationship between variance analysis and management reporting, thecriteria for a reporting process that can communicate action-oriented information tomanagers, and a summary of the criteria for a good management control system.

Chapter Eight: Implementing a New ResponsibilityAccounting SystemThe value of the concepts of structure and process that form the basis of responsibil-ity accounting systems derives from their application to real-world situations andproblems. The ultimate goal is to develop responsibility accounting systems that facil-itate the improved operation of a health care organization. Doing so requires assess-ing how a responsibility accounting system fits into its broader organizational context.This chapter summarizes the key characteristics of a good responsibility accountingsystem. It then positions the responsibility accounting system in an organizationalcontext made up of seven organizational processes, a perspective that is consistentwith much of the shift that is taking place in many organizations toward a focus onprocesses rather than functions.

Additional MaterialsAn appendix at the end of the book contains solutions to the practice cases. A glos-sary of selected terms and concepts used in this book is also provided.

PREFACE

Young_FM_rev.qxd 8/16/03 11:33 AM Page xxiv

xxv

Acknowledgments

I am grateful to several people for assistance in preparing this book. Students in sev-eral courses in Boston Universitys M.B.A. program and undergraduate program pro-vided detailed and valuable feedback on it. Leslie Pearlman, of the University ofWashington, provided numerous suggestions and additions. Sheila McCarthy, a grad-uate of BUs M.B.A. program in health care management; Patricia Doherty, an instruc-tor in BUs Accounting Department; and Jimmy Mistry, a doctoral candidate in BUsAccounting Department, also provided valuable feedback. I am most thankful to theseindividuals for their helpful insights.

Comments on this book are welcomed. Send them to Professor David W. Young,Boston University School of Management, 595 Commonwealth Avenue, Boston, MA02215.

Although I am most appreciative of the considerable assistance I received fromall these individuals, I also recognize that responsibility for the final product, includ-ing any errors that remain, is all mine.

Arlington, Massachusetts David W. YoungJuly 2003

Young_FM_rev.qxd 8/16/03 11:33 AM Page xxv

Young_FM_rev.qxd 8/16/03 11:33 AM Page xxvi

The Author

David W. Young is professor of accounting and control in the School of Managementat Boston University, where he is affiliated with the schools Health Care Managementand Public & Nonprofit Management Programs. He was chairman of the Departmentof Accounting from 1986 to 1991, where he founded the Accounting MBA Program,which he directed from 1989 to 1993. He served as director of the Health Care Man-agement Program from 1992 to 1995. From 1992 to 1995, he also served as commis-sioner and chair of the Massachusetts Hospital Payment System Advisory Commission(HospPAC).

During the past twenty-five years, Young has served on the faculty for severalexecutive education programs at Harvard University. He has lectured and taughtextensively in Europe, Latin America, Japan, and the Middle East and has consultedfor a number of diverse organizations, including health care organizations. He hasserved as a systems engineer for IBM and a program economist for the Agency forInternational Development. He has been a member of the board of trustees for anumber of organizations and continues to serve in this role for a hospital and an artsorganization.

Widely published in the health policy and management and nonprofit manage-ment literature, he is the coauthor (with Robert N. Anthony) of Management Controlin Nonprofit Organizations, which is in its seventh edition and has been translated intoboth Japanese and Italian. He is also the coauthor (with Richard B. Saltman) of TheHospital Power Equilibrium: Physician Behavior and Cost Control, and (with Sheila M.McCarthy) of Managing Integrated Delivery Systems: A Framework for Action. He hasauthored or coauthored over 200 cases and teaching notes that have been used indegree-granting and executive education programs around the world. His articleManaging Clinical Integration in Integrated Delivery Systems: A Framework forAction (coauthored with Diana Barrett) received the 1998 Edgar C. Hayhow Awardfrom the American College of Healthcare Executives as best article of the year. Twoother articles (one coauthored with Sheila McCarthy) have received the HelenYerger/L.Vann Seawell Award from the Healthcare Financial Management Associa-tion for best article of the year in the associations journal.

Young holds a B.A. degree from Occidental College, an M.A. degree in econom-ics from the University of California at Los Angeles, and a D.B.A. degree from the Har-vard University Graduate School of Business Administration. He was a Milton FundFellow at Harvard Medical School and has been nominated four times for BUs pres-tigious Metcalf Award for teaching excellence.

xxvii

Young_FM_rev.qxd 8/16/03 11:33 AM Page xxvii

This book is dedicated to the many health care

professionals whose time, candor, cooperation,

and patience made possible the cases contained

in this book.

Young_FM_rev.qxd 8/16/03 11:33 AM Page xxviii

Documents

MANAGEMENT ACCOUNTING IN HEALTH CARE ORGANIZATIONSdownload.e-bookshelf.de/download/0000/5870/99/L-G-0000587099... · Management accounting in health care organizations / David W