Cost allocation is the method of identifying and assigning costs to the site at which they are incurred. Each branch/location of a medical practice is considered a ‘cost center’ and multi-site medical practices can have varying costs based on the location and services offered at a particular site. For example, sites that house administration will have lower costs than sites that house laboratories or operating rooms. Cost allocation is very beneficial in the management of a multi-site medical practice.
There are several good reasons that allocating costs is important to a multi-site medical practice. When costs are assigned correctly, the types of costs at each location can easily be analyzed, which is very important in the budgeting process. With a budget that is based on accurate cost allocation it is possible not only to see expense overages quickly, but also to correct expense overages quickly. Keeping track of expenses is essential for internal planning.
Direct expenses are easy to comprehend and track. Rent and utilities are two of the expenses that are easy to allocate. Some expenses are a little more difficult. Payroll and benefit expenses, for example, will need to be broken down by location even if the money is distributed from a central location. Supplies can be purchased in bulk and allocated out to the different sites so that that the cost can be captured. All of these are direct costs that can be easily placed at each cost center using an accurate system.
When doing cost allocation it is important to make sure to capture the indirect costs as well.
An example of an indirect cost would be insurance for the practice or legal or accounting services that the practice uses.
Businesses of all types and sizes use cost allocation to operate more efficiently. Having cost allocation gives a multi-site medical practice the ability to plan, budget, and locate issues before they become big problems. Medical practices can also use cost allocation to track patient trends to help shape the future of the practice.
Cost allocation in the budgeting process gives the accountant the information necessary to plan for every site in the practice. A site that sees more elderly patients, for example, will receive different supplies than the site that sees a large number of children. Monthly reviews of cost allocation data can also show changes in the amounts of supplies used at various locations – heading off numerous possible issues.
Multi-site medical practices that use cost allocation have the advantage of operating with more efficiency. Cost allocation helps the practice by providing focus and structure so that financial planning is more transparent and easier to understand.
