Cost Behaviors and Allocation

The relationship between fixed, variable, and total costs of an organization is called cost behavior. It is also known as underlying cost structure, and is used for planning, control, and decision making within the organization. Healthcare organizations face several challenges to try and improve the quality of care and reduce costs at the same time. Their response to how to do this describes their cost behavior. Fixed costs is a cost that are certain regardless of the volume of services that are delivered and will occur even if the facility is closed.

Variable costs are related directly to the amount of service that is delivered. These two costs make up the underlying cost structure of an organization. For example the costs of supplies used to draw blood in a laboratory, would be the variable costs, the costs to keep the laboratory open would be fixed costs. To understand the cost behaviors of the organization you have to figure out the relationship these costs have with the amount of services that they are delivering.

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To manage your costs you want to make sure that you are bringing in enough volume that will cover your costs. Cost allocation is a very important part of cost measurement. It is a pricing process that within the organization where managers allocate the costs of all the departments. Within healthcare organizations the overhead costs, costs from patient services departments, and support costs have to be allocated. Due to this pricing and service offerings are based on the total costs in relation with each services.

If the allocations of overhead costs are allocated properly the organization is better able to make good decisions for the organization. Works Cited Evans III, J. H. (1998). Cost Management and Management Control in Healthcare Organizations: Research Opportunities. Behavioral Research in Accounting , 10, 78-103. Gapenski, L. (2012). Healthcare finance: An introduction to accounting and financial management (5th ed. ). Chicago: Health Administration Press.