This document discusses three methods for estimating provider costs: the cost to charge ratio method, step-down method, and activity based costing. The cost to charge ratio method uses industry norms to estimate the relationship between costs and charges. The step-down method allocates indirect costs like utilities and administration to direct costs. Activity based costing estimates costs by measuring the activities required to produce a service or product.

1. Provider Cost
Finding Methods
Chapter 12

2. Learning Objectives
• Identify three methods to estimate costs
• Calculate costs using a step down method
• Calculate costs using an activity based method
• Understand the major advantages and disadvantages of
activity based costing

3. Cost to Charge Ratio (CCR)
• Common method used by dentists and physicians
• An assumed relationship of cost to charges usually
determined by industry norms
• An advantage is simplicity
• Disadvantages- typical of industry may not apply to whole
organization, CCR may be inaccurate

4. Step Down Method
• A cost finding method based on allocating costs that are not
directly paid for (indirect costs) to products or services that
are directly paid for(direct costs)
• 4 steps used to allocate utilities, administration and
laboratory costs
• Fully allocated cost-Cost of a cost object that includes both
its direct costs and all other costs allocated

6. Cost allocation: Example

7. Solution:

11. Activity Based Costing (ABC)
• Method of estimating the costs of a service or product by
measuring the costs of the activities it takes to produce that
service or product

12. • Top–down approach
• Because it begins with all the costs and allocates them
downward into various services for which payment will be
received.

13. • Bottom up approach
• It finds the cost of each service at the lowest level, the point
at which resources are used and aggregates them upward
into products

14. Cost Terminology
• Direct Costs-Costs that an organization can trace to a cost
object
• Indirect costs-Costs that cannot be traced to a particular cost
object
• Cost Driver- Things that cause a change in the cost of an
activity

15. Summary
• Must be able to measure costs accurately
• 3 approaches
• Cost to Charge Ratio (CCR)
• Step Down Method
• Activity Based Costing