Management accounting in the ICU

Some basic concepts of management accounting are defined and explained below. Resources and costs

Resources of various types are used in the ICU: nurses' and physicians' time, equipment time, disposables, medication, etc. In every productive activity some of these inputs or resources are transformed into outputs. An economist defines these inputs as 'costs', i.e. something that has to be foregone in order to perform the productive activity (Sh§r...iOd PiOoIa 19.86.). This definition does not imply that costs are exclusively expressed in monetary terms. However, in a situation where different resources are required, such as in an ICU, they should be quantified using a common expression and 'money' is the most obvious candidate. Therefore the rational resource management of an ICU requires information about costs expressed in monetary terms.

Two monetary cost concepts can be distinguished: financial costs and accounting costs. These two concepts are easily and frequently confused, with deleterious effects on the quality of cost information.

Financial Costs

The financial manager of a hospital should, in principle, be concerned with real cash flows: the main expenditures incurred before a new product or process begins to earn a return on its investment. This means that the money effectively paid to obtain equipment or other goods and services is their cost in this frame of reference. To avoid confusion, we will call this cost an 'outlay' or investment. Accounting costs

Accounting at the hospital level is called 'financial accounting'. Here we shall consider only those concepts that are relevant to our understanding of accounting information at the hospital and the ICU levels.

The cash basis is considered to be unsatisfactory for cost measurement in a large and complex organization such as a hospital. For example, investment in a building would be recorded as a cost in the fiscal year that the payment is effectively made, with no effect whatsoever on the costs in subsequent years. Therefore allocation of the amount invested over the lifetime of the building ('depreciation') is more appropriate. In fact, this method is an application of the more general 'accrual principle'. The accrual-based system records transactions that do not involve cash, such as depreciation of buildings, unpaid bills, unpaid salaries, and uncollected income. Although conceptually clear, accrual accounting has many intricacies and subtleties which go beyond the scope of the present text. The central idea is that costs are considered as a component of the overall costs of the periods in which the resource paid for has an economic effect, which means in an accounting context that it is related to outputs realized in the same periods of time. Therefore this method of allocation does not take the time at which payment is made into consideration. Consequently, outlays and accounting costs for the same period can differ considerably.

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