| Note on Differential Cost Accounting in Health Care |
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One of the most significant concepts in management accounting is that
different costs are used for different purposes. The result is a need
for the three different types of management accounting systems shown in
Exhibit 1.
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Exhibit 1. DIFFERENT COSTS FOR DIFFERENT PURPOSES
Full Cost
Differential
Cost
Responsibility
Costs Used Direct versus Indirect
Fixed versus
Variable
Controllable versus Noncontrollable
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Activities
Assignment to
Analysis of
Programming
Performed
Cost Center
Cost Behavior
Budgeting
Choice of Allocation Bases
Breakeven Analysis
Measurement
and Variance Analysis
Allocation of Service Center
Contribution Analysis
Costs to Revenue
Centers
Reporting and
Evaluation
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Management
Pricing
Retain or
Discontinue an
Program Additions
Uses/Decisions
Unprofitable Program
and Modifications
Product line
profitability Subcontract for an activity
Cost Control
Strategic decisions
Offer a
Special Price
Performance Measurement
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There is nothing illegal or unethical about looking
at costs differently for different purposes. Rather, as managers’ and
physicians’ decision-making needs change, so too do the costs that are
relevant for a particular decision. With full cost accounting, for
example, the goal is to determine each patient’s or program’s direct
costs and its fair share of the organization’s overhead (or indirect)
costs.
With responsibility accounting, the focus is on the
individuals who exert control over an organization’s costs. Relatively
few hospitals and health systems have developed responsibility
accounting systems. Yet, without such a system, it is difficult to
assist physicians to manage the cost implications of their clinical
decisions.
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