Contribution Margins Inventory and Depreciation Concepts Questions Part 1: Please reflect on the assigned readings for the modules. Choose one topic from
Contribution Margins Inventory and Depreciation Concepts Questions Part 1:
Please reflect on the assigned readings for the modules. Choose one topic from the assigned readings, and provide a brief reflection (1paragraph) stating how this will be applicable to you as a healthcare administrator or working as a healthcare professional.
Part 2:
Please answer all questions below. Please number your responses accordingly.
1. What are contribution margins? Do you believe that contribution margins can help you manage your work (e.g. current or future work)? Please explain.
2. In your own words, please describe a break-even analysis. How do you think you would use break-even analysis?
3.Staffing in healthcare can be difficult due to the different levels of care required depending upon how sick or complex a patients care: how do you balance the financial impact and evaluation vs the human factor? Chapter 10:
Staffing: Methods,
Operations, and
Regulations
Staffing Requirements
In Health Care, many positions must be
filled, or covered, 7 days a week, 24
hours a day.
Productive and
Non-Productive Time (1 of 3)
Why annualize?
Employees are paid for more hours than
the hours they are on duty (vacation days,
etc.)
Annualizing allows the full cost of the
position to be computed through a
burden approach.
Productive and
Non-Productive Time (2 of 3)
Productive Time: Represents the
employees net hours on duty when
performing the functions in his/her job
description.
Non-Productive Time: Represents the
paid-for time when the employee is not on
duty and not performing his/her job
description functions.
Includes paid-for vacation days, holidays,
personal leave days, and/or sick days
Productive and
Non-Productive Time (3 of 3)
Exhibit 10-1 illustrates:
Productive Timenet days when on duty
Non-Productive Timeadditional days paid
for but not worked
FTEs for Annualizing
Staff Positions (1 of 2)
FTE Definition for purposes of
understanding annualizing positions:
The equivalent of one full-time employee
paid for one year, including both
productive and non-productive time
Two employees working half-time for one
year would be the same as one FTE
FTEs for Annualizing
Staff Positions (2 of 2)
The calculations to annualize staff
positions is a two-step process:
1. Compute the net days worked.
2. Convert the net paid days worked to a
factor.
(See Exhibit 10-2 as an example.)
Number of Employees Required to
Fill a Position (1 of 3)
Why calculate by position?
Computing by position is used in controlling,
planning, and decision-making.
The scheduled position method is often
used when forecasting new programs and
services.
You will also find scheduling software
using this method.
Number of Employees Required to
Fill a Position (2 of 3)
FTE definition for purposes of filling a
scheduled position:
A factor expressing the number of
employees required measured against, or
the equivalent of, one full-time employees
standard work week.
Number of Employees Required to
Fill a Position (3 of 3)
The calculation to fill scheduled positions is
as follows:
Compute the number of hours for a full-time
position filled for one year. This measure is the
baseline.
Compute a factor representing the position to
be filled for the required number of days (a
required seven-day week to cover, for example,
versus a five-day work week equals a factor of
1.4).
(See the cast room example in the text.)
Tying Cost to Staffing (1 of 6)
In the case of the annualizing method, the
cost of nonproductive days is already in
the formula.
So
Multiply the factor times the base hourly
rate to compute cost.
(Study the example in the chapter.)
Tying Cost to Staffing (2 of 6)
In the case of the scheduled position method,
the base rate must be increased, or burdened,
by the nonproductive time.
First, increase the hourly base rate by a percent
or factor that represents the nonproductive time.
Then multiply the burdened based rate by the
factor to compute the cost.
Then, multiply the factor times the base hourly
rate to compute the cost.
(Examine the examples in the chapter.)
Tying Cost to Staffing (3 of 6)
The actual cost is attached to staffing in
the books and records
Using
a subsidiary journal and
a basic transaction record
(Both of which are more fully described in
another chapter.)
Tying Cost to Staffing (4 of 6)
An example of a subsidiary journal is the
Payroll Register illustrated in Exhibit 10-5.
Tying Cost to Staffing (5 of 6)
An example of a basic transaction record
is the time card illustrated in Exhibit 10-6.
(Of course this time card format will probably be
computerized.)
Tying Cost to Staffing (6 of 6)
In summary, hours worked and pay rates
are essential ingredients of staffing plans,
budgets, and forecasts
Appropriate staffing is the responsibility of
the manager.
Staffing Regulatory Requirements
The IMPACT Acts Staffing Report
Requirements:
Regulatory specifics about staffing
reports
Additional reporting requirements
Funds provided for report
implementation
Staffing Regulatory Requirements
State Certificate-of-Need (CON) Laws
and Requirements:
Health planning background
Certificate-of-need programs
How CON-related regulations affect
staffing
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas
Calculation for Annualizing
Master Staffing Plan Example
Step 1: Compute Net Paid Days Worked
Total Days in Business Year
Less two days off per Week
Number of Paid Days per Year
Less Paid Days Not Worked:
Holidays
Sick Days
Vacation Days
Education Days
Net Paid Days Worked
RN
364
104
260
9
7
15
3
226
LPN
364
104
260
9
7
15
2
227
NA
364
104
260
9
7
15
1
226
Calculation for Annualizing
Master Staffing Plan: Example
Step 2: Converting Net Paid Days Worked to a Factor
RN
364
226
=
1.6106192
LPN
364
227
=
1.6035242
NA
364
228
=
1.5964912
FTEs to Annualize Staffing:
Assignment Exercise 10-1
Compute Net Paid Days Worked
Total Days in Business Year
Less Two Days off Per Week
Number of Paid Days Per Year
Laboratory
Medical Records
_________
364
_________
104
_________
260
________
364
________
104
________
260
_________
9
_________
7
_________
3
_________
15
_________
0
________
9
________
0
________
0
________
0
________
21
Less Paid days Not Worked
Holidays
Sick Days
Education Days
Vacation Days
Personal Leave Days
Net Paid Days Worked
________
34
________
226
_______
30
_______
230
Covert Net Paid Days Worked to a Factor:
For the Lab.
Total days in business year divided by net paid days worked = factor 364/226
_______________
= 1.610619
For Medical Records
Total days in business year divided by net paid days worked = factor 364/230
_______________
= 1.582609
FTEs to Fill Position
Example (Exhibit 10-4): 8-Hour
Emergency Department Scheduling for Eight-Hour Shifts:
Shift
One
Day
Shift
Two
Evening
Shift
Three
Night
=
24-Hour
Scheduling Total
Position:
Emergency Room
Intake
1
1
1
=
Three Eight-Hour
Shifts
Staff needed to
cover position 7/24
1.4
1.4
1.4
=
4.2 FTEs
One full-time employee works 40 hours per week. One eight-hour shift per day
times seven days per week equals 56 hours on duty. Therefore, to cover seven
days or 56 hours requires 1.4 times a 40-hour employee.
FTEs to Fill a Position:
Practice Exercise 10-2: 8-Hour
Scheduling for Eight-Hour Shifts:
Shift
One
Day
Position:
Admissions Officer
FTEs to cover position equals
Position
Clerical
FTEs to cover position equals
Shift
Two
Evening
Shift
Three
Night
=
24-Hour
Scheduling
Total
2
1
1
=
Four Eight
Hour Shifts
2.8
1.4
1.4
=
5.6
1
0
0
=
One Eight
Hour Shift
1.4
0
0
=
1.4
FTEs to Fill a Position:
Assignment Exercise 10-2: 8-Hour
Scheduling for Eight-Hour Shifts:
Position:
Nursing Supervisor
Technician
Nurses
Clerical
Aides
Shift One
Day
Shift Two
Evening
Shift Three
Night
2.8
2.8
4.2
1.4
1.4
1.4
2.8
2.8
0
0
1.4
1.4
2.8
0
0
=
=
Total FTEs needed to cover all shifts
FTEs Seven
Day Week
5.6
7.0
9.8
1.4
1.4
25.2
FTEs to Fill a Position:
Example: 12-Hour Shifts
Emergency Department Scheduling for Twelve-Hour Shifts:
36-Hour Week
Position:
Emergency Room
Intake
Staff needed to cover
position 7/24
Shift
One
Shift
Two
1
1
=
Two Twelve
Hour Shifts
2.33
2.33
=
4.66 FTEs
=
24-Hour Scheduling
Total
One full time employee works 36 hours per week. One twelve-hour shift per
day times seven days per week equals 84 hours on duty. Therefore, to cover
seven days or 84 hours requires 2.33 times a 36-hour employee.
FTEs to Fill a Position:
Assignment: 12-Hour Shifts
Scheduling for Twelve-Hour Shifts: 36 Hour Week
Shift One Shift Two
Position:
Nursing Supervisor
Technician
Nurses
Clerical
Aides
4.66
2.66
7
1.4
2.33
2.33
4.66
4.66
0
0
=
=
Total FTEs needed to cover all shifts
FTEs Seven Day
Week
7
9.33
11.66
1.4
2.33
31.75
FTEs to Fill a Position:
Example: 12-Hour Shifts
Emergency Department Scheduling for Twelve-Hour Shifts:
48-Hour Week
Shift
One
Position:
Emergency Room Intake
Staff needed to cover
position 7/24
Shift
Two
=
24-Hour Scheduling
Total
Two Twelve Hour Shifts
1
1
=
1.75
1.75
=
3.5 FTEs
One full time employee works 48 hours per week. One twelve-hour shift per
day times seven days per week equals 84 hours on duty. Therefore, to cover
seven days or 84 hours requires 1.75 times a 48 hour employee.
FTEs to Fill a Position:
Assignment 12-Hour Shifts
Scheduling for Twelve-Hour Shifts: 36-Hour Week
Position:
Nursing Supervisor
Technician
Nurses
Clerical
Aides
Shift One
Shift Two
=
FTEs Seven Day
Week
3.50
3.50
5.25
1.4
2.33
1.75
3.50
3.50
0
0
=
5.25
7
8.75
1.4
2.33
Total FTEs needed to cover all shifts
24.73
Chapter 9:
Understanding
Inventory and
Depreciation
Concepts
Inventory Concept (1 of 2)
Inventory includes all the items (goods)
that an organization has for sale in the
normal course of its business.
Inventory is a current asset on the
balance sheet, because items in the
inventory are expected to be sold within a
twelve-month period.
Inventory Concept (2 of 2)
Various healthcare organizations and/or
their departments deal with inventory and
must account for it, including:
All pharmacies (hospital-based, retail brickand-mortar, or mail order)
The hospital cafeteria
The hospital gift shop
Interrelationship Between Inventory
and Cost of Goods Sold (1 of 2)
The completed inventory item is sold.
That is how an item moves out of inventory
and is recognized as cost.
When it is recognized as cost, it then
becomes cost of goods sold (or cost of
drugs sold, in the case of the pharmacy).
So it moves out of inventory on the balance
sheet and becomes cost of goods sold on
the statement of income.
Interrelationship Between Inventory
and Cost of Goods Sold (2 of 2)
Recording inventory and costs of goods (or
drugs) sold is a sequence of events
Record beginning inventory
Record purchases during period
Beginning inventory plus purchases equals
cost of goods (or drugs) available for sale
Record ending inventory
Cost of goods (or drugs) available for sale
less ending inventory equals cost of goods
(or drugs) sold
Figure 9-1 Recording Inventory in the Accounting Cycle.
Interrelationship Between Inventory
and Cost of Goods Sold
Gross Margin equals revenue from sales
less the cost of goods (or drugs) sold, as
follows:
Sales
Cost of goods (drugs) sold
Gross margin
100%
65%
35%
An organizations gross margin can
readily be compared to industry
standards.
Inventory Methods
How is the inventory to be valued? The
two most commonly used methods are:
First-In, First-Out (FIFO) inventory method
Last-In, First-Out (LIFO) inventory method
Inventory Methods: FIFO
The FIFO inventory costing method
recognizes the first costs placed into
inventory as the first costs moved out into
cost of goods (or drugs) sold when a sale
occurs.
So if costs have risen during the year,
under FIFO the ending inventory will be
higher (because the oldest less costly
inventory items moved out first).
(Exhibit 9-1 illustrates this effect.)
Inventory Methods: LIFO
The LIFO inventory costing method
recognizes the latest, or last, costs placed
into inventory as the first costs moved out
into cost of goods (or drugs) sold when a
sale occurs.
So if costs have risen during the year, under
LIFO the ending inventory will be lower
(because the latest more costly items moved
out first, leaving the older less costly items
still in inventory).
(Exhibit 9-2 illustrates this effect.)
Other Inventory Methods (1 of 2)
Two other inventory treatments also
deserve mention. They are:
Weighted Average inventory method
No Method
Other Inventory Methods (2 of 2)
The weighted average inventory method
is based on the weighted average cost of
inventory during the period (calculated as
cost of goods available for sale divided by
number of units available for sale).
If there is no method at all, the inventory
is never recognized. In some cases not
recognizing inventory can result in
misleading financial statements.
Inventory Tracking
The two most typical inventory tracking
systems are:
The perpetual inventory system
The periodic inventory system
Two types of adjustments to inventory that
usually become necessary include
adjustments for shortages and for obsolete
items
Inventory Distribution Systems
Distribution Using Sign-Off Forms
Distribution Using Robotic Technology
Robotic automation
Cost/benefit of a robot
Calculating Inventory Turnover
Inventory turnover is a ratio that shows how fast
inventory is sold, or turns over:
1. First compute Average Inventory (Beginning
Inventory plus Ending Inventory divided by two
equals Average Inventory.)
2. Next compute Inventory Turnover (Cost of Goods
Sold divided by Average Inventory equals Inventory
Turnover)
(Figure 9-2 illustrates the sequence of this
computation.)
Figure 9-2 Calculating Inventory Turnover.
Health Care Finance by Judith J. Baker and R.W. Baker.
Copyright © 2011 by Jones and Bartlett Publishers, LLC
FIFO Inventory:
Solution to Assignment 9-1
Assumptions
Sales (Revenue)
FIFO Inventory Effect
900 units @$100 =
$90,000
Cost of Sales:
Beginning inventory
500 units @$50 =
$25,000
Plus: Purchases
400 units @$50 = 20,000
100 units @$65 = 6,500
400 units @$85 = 32,000
58,500
SubTotal
$83,500
Less: Ending
inventory
100 units @$65 = 6,500
400 units @$85 = 32,000
Cost of Sales
[aka Cost of Goods Sold
38,500
45,000
Gross Profit
Cost of Sales %
$45,000
(45,000 divided by 90,000) =
50%
LIFO Inventory:
Solution to Assignment 9-1
Assumptions
Sales (Revenue)
LIFO Inventory Effect
900 units @$100 =
$90,000
Cost of Sales:
Beginning inventory
500 units @$50 =
Plus: Purchases
400 units @$50 = 20,000
100 units @$65 = 6,500
400 units @$85 = 32,000
SubTotal
$25,000
58,500
$83,500
Less: Ending
inventory
500 units @$50 =
Cost of Sales
[aka Cost of Goods Sold]
25,000
58,500
Gross Profit
Cost of Sales %
$31,500
(58,500 divided by 90,000) =
65%
LIFO Inventory Turnover:
Solution to Assignment 9-2.1
Average Inventory: $25,000
Inventory Turnover: 2.34
FIFO Inventory Turnover:
Solution to Assignment 9-2.2
Average Inventory: $31,750
Inventory Turnover: 1.41
Depreciation Concept (1 of 2)
Depreciation expense spreads, or
allocates, the cost of a fixed asset over
the useful life of that asset.
Fixed assets are placed on the balance
sheet as long-term assets.
Their cost is recognized each year
through depreciation expense.
So the cost is spread, or allocated, over a
period of years.
Depreciation Concept (2 of 2)
The useful life of the asset determines the
period over which the fixed assets cost
will be spread.
Salvage value (aka residual value or
scrap value) represents any expected
cash value of the asset at the end of its
useful life. The remaining salvage value is
not depreciated, because it is expected to
be recovered.
Interrelationship Between Depreciation
Expense and the Reserve for
Depreciation
Depreciation expense over the years is
accumulated into the Reserve for
Depreciation. So the two are interrelated:
Depreciation expense for the year is recorded in
the Income Statement.
The same amount is also added to the
cumulative amount accumulating on the Balance
Sheet in the Reserve for Depreciation
The two amounts should balance each other
(The interrelationship is illustrated in Figure 9-3.)
Figure 9-3 Interrelationship of Depreciation Expense and Reserve for Depreciation in
the Accounting Cycle.
Net Book Value (1 of 2)
The net book value (aka book value) of a
fixed asset:
Is a balance sheet figure that represents the
remaining undepreciated portion of the fixed
asset cost
The term derives from value recorded on
the booksthus book value
Net Book Value (2 of 2)
The net book value of a fixed asset is
computed as follows:
Determine original cost of fixed asset on the
balance sheet
Subtract the reserve for depreciation
The result equals net book value at that
point in time
(The computation sequence is illustrated in
Figure 9-3.)
Figure 9-4 Net Book Value Computation.
Five Methods of Computing
Book Depreciation
Book Depreciation can be computed in
any one of five methods:
Straight-line Depreciation Method
Accelerated Book Depreciation Methods:
o Sum-of-the-Years Digits (SYD) Method
o Double-Declining-Balance (DDB) Method
o 150% Declining Balance (150% DB) Method
Units of Service or Units of Production
(UOP) Method
Depreciation Methods (1 of 2)
Straight-line depreciation assigns an equal or
even amount of depreciation expense over
each year or period of the assets useful life.
Accelerated depreciation writes off more
depreciation expense in the first part of the
assets useful life.
Units-of-Service depreciation assigns a fixed
amount of depreciation to each unit of service
or output that is produced. (Thus a fixed total
units of service over the life of the asset is used
instead of number of years of useful life.)
Depreciation Methods (2 of 2)
Straight-line depreciation is illustrated in
the following Table 9-1 (with no salvage
value) and Table 9-2 (with salvage value).
Further details appear in the chapter.
Further details about computations of
other methods of book depreciation
appear in Appendix 9-A at the end of the
chapter.
Computing Tax Depreciation
Tax depreciation is beyond the scope of
this book. We merely recognize that it is
computed for tax purposes and at this
time includes the following methods:
Modified Accelerated Cost Recovery System
(MACRS)
General Depreciation System (GDS)
Alternative Depreciation System (ADS)
Depreciation Concepts: Example 9A
Straight Line:
Step 1: Compute the cost net of salvage
or trade-in value: 200,000 less 10 percent
(S or T value) = $180,000
Step 2: Divide by expected life years (aka
estimated useful life) = $18,000
depreciation per year for 10 years
Depreciation Concepts:
Example 9A: Accelerated (1 of 2)
Step 1:
Compute the straight-line rate:
1 divided by 10 equals 10 percent.
Step 2:
Double the rate (as in double declining
method): 10 percent times 2 equals 20
percent.
Step 3:
Compute the first years depreciation
expense: $200,000 × 20% = $40,000.
Step 4:
Compute the carry-forward book value
at the beginning of year two:
$200,000 40,000 = $160,000.
Depreciation Concepts:
Example 9A: Accelerated (2 of 2)
Compute the second years
depreciation
expense: $160,000 × 20% = $32,000.
Step 6:
Compute the carry-forward book value
at the beginning of year three:
$160,000 32,000 = $128,000.
Continue until the assets salvage or trade-in
value has been reached.
Step 5:
Depreciation Concepts: Practice
Exercise 9-1.1
Straight-line depreciation would amount to
$18,000 per year for 10 years.
1. Compute cost net of salvage value or
trade-in (S or T): ($600,000 less $60,000
equals $540,000)
2. Divide result by expected life: ($540,000
divided by 10 equals $54,000
depreciation/year for 10 years)
Depreciation Concepts:
Assignment Exercise 9-3
Double declining depreciation for the laboratory equipment
Year
1
2
3
4
5
Book Value at
Beginning of Year
300,000
180,000
108,000
64,800
38,880
Depreciation Expense
300,000 × 40% = 120,000
180,000 × 40% = 72,000
108,000 × 40% = 43,200
64,800 × 40% = 25,920
38,880 15,000 = 23,880
Book Value at
End of Year
300,000 120,000 = 180,000
180,000 72,000 = 108,000
108,000 43,200 = 64,800
64,800 25,920 = 38,880
38,880 …
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