ACCT 521 Week 1 Discussion Board Forum 1 Example

Discussion Board Forum 1: Cost Concepts and Cost Behavior

ACCT 521 Advanced Cost Accounting, Discussion Board Forum 1

Thread by [Student Name]

The hospital, its figures and the classmates are composites; the textbook and the research cited are real.

Riverbend Community Hospital has 180 beds, and its medical-surgical units run at a daily census between 140 and 175 patients. The units are staffed at a ratio of one nurse for every five patients per shift. Riverbend employs 96 core nurses on salary, covering a census of up to about 150. When census rises above that, it calls in per diem nurses, paid only for shifts worked at $52 an hour, and in peak weeks it adds agency nurses at $95 an hour.

Lanen et al. (2017) define a fixed cost as one that does not change in total with activity within the relevant range and a variable cost as one that changes in total in proportion to activity. Core nurse salaries are fixed within Riverbend's normal range: the hospital pays them whether census is 140 or 150. Per diem and agency costs are variable, but not smoothly. Because of the staffing ratio, every five additional patients require another nurse for a 12-hour shift, so cost rises in steps. At a census of 160, the hospital needs two extra nurses per shift beyond core coverage, about $2,500 a day in per diem pay across day and night shifts; at 175, it needs five, and some come from the agency, pushing the daily cost above $7,000. Total nursing cost is fixed until the census passes the core staff's capacity, then climbs in steps whose height depends on who fills the shift.

How much of nursing cost is fixed is not only a fact of the industry; hospitals choose it. Pizzini and Vansant (2024) studied more than 2,000 U.S. hospitals and found that those with monopsony power in their labor and supply markets adopted more elastic cost structures, procuring resources on flexible, short-term and variable terms rather than through long-term commitments. A hospital that can easily hire per diem staff at reasonable rates can keep its core staff smaller and its costs more variable. For Riverbend's budget, the lesson is to forecast census by week, not by year, because the step pattern means that an average census can hide very different costs.

Reply to Ashley

Ashley, you pointed out that your hospital covers busy weeks with overtime for core nurses instead of per diem staff, and that choice changes the cost behavior in an interesting way. Overtime is variable, since it is incurred only when census rises, but at time-and-a-half it is more expensive per hour than a regular shift. Using Riverbend's figures, if a core nurse earning $44 an hour works a 12-hour overtime shift, the cost is about $792, compared with $624 for a per diem nurse at $52. Overtime avoids the fixed cost of a larger core staff, but past a certain point it becomes the most expensive way to add capacity, and long shifts carry their own risks for patient care. A step-cost chart comparing overtime, per diem and agency at each census level would make the trade-off visible to your nursing director, and it could become a standing part of the weekly staffing meeting.

Reply to Brandon

Brandon, your thread used the relevant range well when you noted that Riverbend's core staff can cover a census of up to about 150, and I wanted to add what happens if the hospital opens a new 24-bed unit. Lanen et al. (2017) caution that cost classifications hold only within the relevant range. The new unit would raise the capacity at which the fixed core staff is exhausted, so the hospital would hire more salaried nurses and the step pattern would begin at a higher census. Costs that were variable at the old capacity become partly fixed at the new one. That is why budgeting for an expansion requires re-estimating cost behavior instead of extrapolating last year's rates, even if the hospital's daily census barely changes in the first months. Pizzini and Vansant (2024) suggest that the choice between adding fixed core staff and relying on flexible labor is itself strategic, so the expansion decision should include both options.

References

Lanen, W. N., Anderson, S. W., & Maher, M. W. (2017). Fundamentals of cost accounting (5th ed.). McGraw-Hill Education.

Pizzini, M., & Vansant, B. (2024). Monopsony power and cost structure: Evidence from the U.S. hospital industry. Journal of Management Accounting Research, 36(2), 157-177. https://doi.org/10.2308/jmar-2022-078