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Chapter 31 : Costs, Budgeting, and Financial Decision Making

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Costs, Budgeting, and Financial Decision Making, Page 1 of 2

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Abstract:

This chapter provides an overview of financial accounting and financial analysis. It discusses the types and behaviors of costs. Direct costs are clearly associated with the item being costed, while all other costs are indirect. The chapter reviews how to measure full cost and how it differs from marginal cost. An extensive costing example showed what data are needed to generate a cost analysis and how to cost a basic laboratory test. Understanding the relationships among cost, volume, and profits has allowed to calculate contribution margin—the revenue per unit of service (UOS) less its marginal cost—and breakeven point, which is total fixed cost divided by the contribution margin per UOS. The chapter discusses the budget process and reviews three common types of budgets: the operating budget, the capital budget, and the cash budget. It summarizes basic accounting concepts and an example of how double entry accounting works, and focuses on three primary financial statements. They are balance sheet, the income statement, and the cash flow (CF) statement. Four types of financial ratios are used to reveal information about an organization’s financial health from its financial statements. Finally, the chapter reviews the basic ways a company raises capital from outside the organization.

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31

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Figures

Image of Figure 31.1
Figure 31.1

Cost behavior.

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Image of Figure 31.2
Figure 31.2

Variable, fixed, and total cost.

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Image of Figure 31.3
Figure 31.3

Variable, fixed, and total expense and revenue.

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Image of Figure 31.4
Figure 31.4

Graphical representation of the break-even point for a hematology division.

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Image of Figure 31.5
Figure 31.5

Break-even point for equipment purchase.

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Image of Figure 31.6
Figure 31.6

Break-even point for a capitated contract.

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Image of Figure 31.7
Figure 31.7

Example of a volume control chart and associated calculations

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Image of Figure 31.8
Figure 31.8

Accounts receivable transaction

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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References

/content/book/10.1128/9781555817695.chap31
1. Finkler, S. A. 1994. Cost Accounting for Health Care Organizations. Aspen Publishers, Inc., Gaithersburg,Md.
2. Horngren, C. T. 1984. Introduction to Management Accounting, 6th ed. Prentice-Hall, Inc., Englewood Cliffs, N.J.
3. Joy, O. M. 1983. Introduction to Financial Management, 3rd ed. Richard D.Irwin, Inc., Homewood, Ill.
4.Richard D. Irwin, Inc., and E. J. Pavlock. 1994 Financial Management for Medical Groups. Englewood, Colo

Tables

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Table 31.1

Key variables for a hematology laboratory with static volume

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
Generic image for table
Table 31.2

Test run calculation for a hematology laboratory with static volume

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
Generic image for table
Table 31.3

Cost calculation for a hematology laboratory with static volume

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
Generic image for table
Table 31.4

Key variables for a hematology laboratory with additional volume

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
Generic image for table
Table 31.5

Test run calculation for a hematology laboratory with additional volume

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
Generic image for table
Table 31.6

Cost calculation for a hematology laboratory with additional volume

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.7

NPV of direct purchase versus installment purchase

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.8

NPV of two different pieces of equipment

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.9

Staffing worksheet

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.10

Worksheet for constructing a budget

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.11

Variance report

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.12

Balance sheet for an organization as of September 2000

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.13

Income and expense statement for an organization, year-to-date September 2000

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
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Table 31.14

Cash flow statement for an organization, September 2000

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31
Generic image for table
Table 31.15

Ratio analysis for an organization, September 2000

Citation: Tolzmann G, Vincent R. 2004. Costs, Budgeting, and Financial Decision Making, p 525-550. In Garcia L, Baselski V, Burke M, Schwab D, Sewell D, Steele J, Weissfeld A, Wilkinson D, Winn W (ed), Clinical Laboratory Management. ASM Press, Washington, DC. doi: 10.1128/9781555817695.ch31

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