CA3
Terms
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- Are hosptial pharmacy departments a cost-center or a profit-center?
- cost-center (don't sell goods and services, contribute to profitability by providing goods and services that improve quality of care, get patients out of hospital sooner, and keep costs down)
- Are community pharmacies cost-centers or a profit-center?
- profit-center
- What factors impact the net profit of community pharmacies?
- increasing sales, decreasing costs and expenses
- Decreasing what type of costs may decrease sales?
- promotions
- What is the definition of a cost?
- a sacrifice of resources (represented by outlays of cash, promises to pay cash in future, or expiration of the value of an asset)
- What is the definition of an expense?
- specific type of cost which is charged against (deducted from) revenue in an accounting period
- Are expenses or costs always included on the income statement?
- expenses are always included
- All expenses are costs, but not all costs are expenses
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- What is the definition of an opportunity cost?
- the return that could be realized from the best foregone alternative use of a resource (expressed as difference in costs between 2 alternatives (both out of pocket expenses and forgone income)
- What is the definition of direct costs?
- costs which are directly caused by or result from performing a particular activity
- What is the definition of indirect costs?
- costs which are related to, but not directly caused by or result from performing a particular activity
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Does this describe direct or indirect costs:
"costs which WOULD NOT occur if the activity were not performed" - direct costs
- What is the definition of fixed costs?
- costs which stay the same regardless of changes in sales volume
- What is the definition of variable costs?
- costs which change in proportion to changes in sales volume (when sales volume is 0, these costs will also be 0)
- What is the definition of semi-variable costs?
- costs which include both a fixed and variable component (even if sales were zero, some of these costs would still be present)
- Can a cost be EITHER a direct or indirect cost?
- Yes
- remember that direct/indirect and fixed/variable are separate concepts
- therefore, a cost ca be a direct cost and a fixed cost, a direct cost and a variable cost, etc etc.
- What is the definition of a sunk cost?
- an expenditure made in the past that can not be changed
- Examples of salary expenses on the pro forma income statement for calculating COD
- wages, fringe benefits, payroll taxes paid by the pharmacy
- Examples of facility related indirect costs (indirect costs related to the physical facilities where the activity will take place
-
-fixed rent
-repairs and maintenance on buildings and fixtures
-utilities
-depreciation on fixtures and buildings
-store liability insurance - Examples of indirect variable costs (non-facility)
-
-rent as a % of sales
-telephone
-promotional expenses (advertising)
-miscellaneous expenses - Examples of direct costs
-
-professional
-pharmacy computer
-RPh malpractice insurance
-Rx labels and containers
(COGS IS NOT included) -
Allocation rules:
Direct Costs - 100% allocated to cost of performing the activity
- Salary expense
- costs corresponding to the % of time spend performing the activity are allocated
- Facility Related Costs (FRC)
- costs allocated based on the RATIO OF FLOOR SPACE dedicated to the activity to the floor space of the entire pharmacy
- Indirect Variable Costs (IVC)
- costs allocated based on the RATIO OF SALES generated by the activity to total sales
- What are the management implications of COD? (2)
-
1)pharmacies must generate, on avg, at least the COGS + COD on every prescription to generate a net profit from dispensing
2)explains why pharmacies often set a minimum prescription charge