Managing Cost Centers

Journal Article Review Paper Emily Croushore A. T. Still University For purposes of planning and control, an organization may be divided into specific units all of which are assigned as the responsibility of the unit’s manager (Baker & Baker, 2011). These units are classified as cost centers and may be grouped into a larger category that all have something in common (Baker & Baker, 2011). For example the laboratory and radiology department can each be seen as a separate cost center that can be grouped together under the category of professional services.In the case of a cost center, a particular unit of the organization is given responsibility for controlling costs of the operations in which it holds authority (Baker & Baker, 2011).

For planning and controlling purposes, being able to track all expenses to one particular cost center is crucial to management’s determination regarding the level of the cost center’s productivity and efficiency. I currently work as a front desk clerk for a multi-physician general medicine practice in Gilbert, AZ.The impressive state of the art facility is fully equipped with the latest technology and equipment in addition to its on-site laboratory and radiology department. Our organization can be classified as a service line. “In traditional cost accounting circles, a product line is a grouping of similar products. In the healthcare field, may organizations opt instead for “service line” terminology…or a grouping of similar services” (Baker & Baker, 2011, p. 37).

With regards to the organization’s expenses, the facility is made up of different cost centers that are each allocated specific responsibilities relating to controlling the costs of the operation over which it holds authority. “Cost centers can then be grouped into larger groups that have something in common” (Baker & Baker, 2011, p. 42). Within our organization, three specific groups of cost centers include general services, support services, and operational services.All expenses will be traced back to one of these three categories of cost centers. An expense in its broadest sense includes every expired (used up) cost that is deductible from revenue (Baker & Baker, 2011). According to Baker & Baker, “a general services expense provides services necessary to maintain the patient, but the service is not directly related to patient care” (2011, p.

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43). Specific examples of our organization’s general services cost center include maintenance, housekeeping, and medical records.While each of these three examples are not directly related to patient care, they are nevertheless pivotal to the maintenance of the patient. The operations category of cost centers provides service that is directly related to patient care (Baker & Baker, 2011). Examples of cost centers within the organization that encompasses the operations category include: According to Baker & Baker, “a support service expense is necessary for support, but is neither directly related to patient care nor is it a service necessary to maintain the patient” (2011, p. 3-44). Five cost centers encompass the support services category at our organization; one “general” cost center that entails administrative costs; while the remaining four (insurance, social security taxes, employee welfare, and pension) are related to employee salaries and wages (Baker & Baker, 2011).

These particular cost centers are handled within one department at our organization; the human resources department.For the purposes of planning and control, it critical that each expense be traced back to one of these three categories of cost center and expense. That way the manager will be able to determine the strengths and weakness of each cost center as it relates to outputs and efficiency. The successful manager, through planning, organizing, controlling, and decision making, is able to adjust the organization’s inflow (revenues) and outflow (expenses) of money to achieve the most beneficial outcome for the organization (Baker & Baker, 2011).In the planning phase, the manager will identify objectives for each cost center and determine the steps required for accomplishing these objectives in order to carry out the organization’s overall mission (Baker & Baker, 2011). During the controlling phase, the manager ensures that each cost center is following the plans that have been established, usually by studying current reports and comparing them with reports from earlier periods (Baker & Baker, 2011).During the decision making phase, the manager relies on feedback and information yielded through analysis and evaluation to make an informed decision among available alternatives (Baker & Baker, 2011).

The cost centers one particular weakness is that it relies on the measurement of spending to assess performance (Scarlett, 2007). According to Management Accounting-Performance Evaluation, cost centers are designed in one of two ways: either it is given a fixed quantity of inputs and required to maximize outputs, or it is set a required level of outputs to achieve while minimizing inputs (Scarlett, 2007).There is no direct incentive for the manager to enhance the quality of its output. While costs can always be contained by reducing quality, in the case of a cost center, “quality reduction is not identified by the use of financial performance metrics” (Scarlett, 2007, p. 1). All-Business (2004) forecasts that within the risk-bearing managed care enterprise, the concept of profits in hospitals will be replaced by acute-care cost centers that are integrated in their delivery of service.This transformation will increase the difficulty for internal accounting systems to perform the important task of tracking expenses to a particular cost center and properly match revenues and expenses (All Business, 1994).

For example, flexible budgeting and cost accounting are much more difficult in a cost center environment than a profit center because managed care customers will not be buying hospital services directly and therefore matching any revenue to acute-care expense will be technically incorrect and potentially misleading (All Business, 1994).References All Business. (August 1, 1994). Hospitals become cost centers in managed care scenario [data file]. Available December 10, 2010, from allbusiness. com Web site: http:/? /? www. allbusiness.

com/? personal-finance/? health-care-health-plan/? 452630-1. html Baker, J. , & Baker, R. (2011). Health care finance: basic tools for non-financial managers (3rd ed. ). Sudbury, MA: Jones and Bartlett Publishers.

Scarlett, B. (2007). Management Accounting- Performance Evaluation. Financial Management, 41-43. Retrieved from Business Source Premier database. (14719185)

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