Ruger Clinic, Revenue Centers and Service - Essay Example

The document shows that the total value of cost pool is $100,000. A cost pool is total of all costs known as overheads that have to be allocated to departments known as cost centers which are basically area where cost-incurring activities take place. Similarly we can also see that we can allocate these costs to Revenue Centers and Service centers depending on the cost drivers. Here the two cost drivers for Rugers Clinics are revenue and service hours. If we allocate costs to different departments using those cost driver, we can see that allocation rate for diving cost on the basis of revenue will be 100,000/ 5 M = $0.002. Similarly, if we use service hours as a cost driver, the allocation rate will be $20. There are various advantages of cost volume profit analysis which medical or health care industry can exploit to become more efficient at analyzing different levels of activity. It can then use the optimal activity level to increase its profitability. Hence we can say that cost volume profit analysis can be used to enhance the profitability of the health care industry. A medical company which is diversified in various different operation or have different departments can use it to see if operating on a large scale will be more efficient and whether or not it is worth putting more time and effort into the business. Similarly, there are chances that fixed are less than variable costs for a department. However, this will be only visible after CVP analysis, whether or not we can start a new department, it is feasible or not. Hence, a medical company will have to use CVP analysis to look at the profitability of a new department if they plan to diversify its services. As we know that modern machinery is pervading the health care industry, a lot of investment needs to be done. Hence, this implies long-term commitment with specialized labor (doctors, surgeon, support staff etc) which means heavy burden of costs on a firm. However, CVP analysis is a toll that can be used by these firms to assess how long it will be before they will be able to cover their costs and start making profit. This is important when you have more than one alternative, and you look CVP to choose the best option, where cost recovery is fast and profit-making potential is highest. Similarly, there are various assumptions that we have to make when we go about doing CVP analysis. One such assumption is that fixed remain constant. This may not be true, but it is easier for managers in the field of health care to plan ahead, and as discussed above, it may help them to choose the best alternative. Machinery improves efficiency, and medical-service managers can use it to convince their manager or investor to attract investment by showing them CVP results. Capitation is a fixed flat payment made to a health-care services provider for providing service to a particular segment or defined population. These payments are made on per capita basis that is calculation is done on per-person basis and are made monthly or as the contract states. The three most widely used methods of capitation are fee-for-service, cost and demographic approach. In the fee-for-service approach, the revenue line is mostly upward sloping. It starts from zero as when there is zero level of activity, there is no revenue for the health-care service provider, but it goes up with the level of activity. The higher the number of people to whom service is provided, the greater the revenue. In the cost approach, rather than a fixed fee is charged, the company charges total costs that are incurred in providing health care services, and then that fee is charged to the client. This approach can be referred as "pay for all approach and was very common in traditional capitation payments. In demographic capitation, pharmacists are only responsible or contract to provide their services to people of specific age, gender and geographic location. This is done to buffer them from unexpected disease found in particular demographic group and to make sure that they do not suffer as a result of it. If we now compare the three different types of capitation, we can see that the best model of capitation is fee-for-service for heath care service provider's point of view. Here the company gets whatever cost it incurs by providing service. Hence, this is the safest and most profitable type of capitation without any risk involved. Similar to this is the cost capitation. Here all the costs are paid for, but if there is inflation, there are chances of making profit on future transactions are reduced. Similarly, in the demographic approach you are hedged against uncertainty, but what if a contagious disease if found in the demographic group that is eligible to get you services. CAPITATION RATES: Fee-for-service = (Number of Services * Service Charges)/(Total People who were provided service) Cost Approach =( Total Cost + Mark-up) /(Total People who were provided service) Demographic Approach =( Number of Service * Service Charges) /(Total People who were provided service) From the rates we can see that the capitation rate formula for demographic rate and fee-for-service is same, the difference between the two is that service are provided to every demographic group, whereas in demographic approach, services are provided to only one particular demographic group. The difference between the cost approach and fee-for-service and demographic approach is that instead of calculating a service fee, total cost of services is calculated and then a predetermined rate of mark-up is added to earn profit. There are a lot of difference between the tradition and zero-based budgeting. The major difference between the two is that in tradition budget only increases in the budget from previous year's budget have to be sanctioned or approved, whereas in zero based budgeting all expenditures have to be approved after careful examination of all processes and department's efficiency. In other words we can say that zero-based budgeting is more comprehensive than traditional budgeting and thus can be used as a more comprehensive tool to control the efficiency and performance of a department and firms. In zero-based budgeting, there is efficient use of resources and managers are encouraged to find cost-effective ways of doing things. This does not happen in traditional budgeting where managers take it for granted that they are going to get the amount and only the increase will have to be sanctioned. It is also useful in detecting inflatable budgets, which is not possible in traditional budgets as expenditure at different level of activity is not considered. Similarly, zero-based budgeting forces cost centers to align their goals with the overall goals with overall organizational goals. This does not happen in traditional budget where all other departments are treated as separate entities. However, since zero-based budgeting is more comprehensive, it also more time consuming and thus more effort is required. On the other hand, traditional budgeting is easy to use and can be calculated and implemented really quickly. In zero-based budgeting, all expenditures have to be justified first. This hinders the productivity of service department particularly that of R & D where heavy expenditure can be very fruitful or it can also exploit no benefit at all. In traditional budgeting this is not the case, and hence departments work with freedom and levy their best effort to develop new products and to yield rewards for themselves and the firm, without having to worry about excessive control. References: 1. William Cleverly and Andrew Cameron. (2006). Essentials of Health Care Finance. Jones and Bartlett. 2. Harold Randall. (1996). Accounting. Lett's Educational 3. James Van Horne. (2004). Fundamentals of Financial Management. Prentice. Read More