Understanding calculating and assigning cost items

The calculation of unit costs consists of two general categories:

• Direct assignment or calculation of costs based on detailed charge or cost data.
• The allocation of costs based on a spread methodology using a statistic or other basis.

Unit cost calculations need to be processed in a specific order, with direct assignment methods processed prior to the allocation type of methods. Additionally, the relative cost unit method needs to be processed last, as it relies on the results from other methods to calculate the costs.

Direct Assignment calculation

The following table describes the Direct Assignment methodologies supported for unit cost calculation:

Method	Description
Transaction Microcost	Sometimes referred to as Acquisition or Direct Costing. Transaction Microcost simply means that you can use the cost information that is often available in a patient care system directly in the costing process. You need to extract the data from the source system, which may include a surgical or operating room system, pharmacy system, and so on.
Microcost	Sometimes referred to as Standard Costing. Microcost simply means that you can associate a known cost value directly with the cost item. A Microcost table stores and assigns the cost to the encounter cost-detail level when processing this method. The Microcost method is often used for supply items or other directly contracted service, such as a reference lab fee for a send-out test.
Reverse Markup	A useful method to use to estimate the cost of an item when a chargeable item’s price is generated based on a markup table and when the specific cost may not be known using a Microcost method. This method is only available for chargeable items with the actual per-unit charge available in the Cost Detail transaction data.

Important: The Direct Assignment methods listed above can produce results that do not align with your GL dollars. If there are no remaining cost items to allocate costs to in the cost category that you have assigned costs to, then a variance to the GL occurs. There are three ways to handle a variance:

1. Use an allocation method to spread a variance to any remaining cost items for the department for the cost pools.

2. Use a reclass to move any remaining dollars in the department in the cost pool to a new cost pool, and spread them to a selection of cost items in the department.

3. Ignore the variance and leave it as a variance.

Spread calculation

The following table describes the Spread methodologies supported for unit cost calculation:

Method	Description
Relative Value Units (RVU)	An allocation method that depends on a unit of relative value to determine the items that should receive more cost than others.
Provider RVU	An allocation method that uses a relative value unit (RVU) but enables you to allocate provider expenses (generally salaries) directly to his or her patients. This is a process that requires general ledger costs so that accounts are associated with individual providers.
Ratio of Cost to Charges (RCC) Allocations	Widely used to allocate costs according to the price or charge for the item.
Relative Cost Unit (RCU) Allocations	A Kaufman Hall term used to denote the Axiom Cost Accounting ability to map previously calculated cost values as a means of spreading costs without the need to define and load them as an RVU.

IMPORTANT: When using more than one method per cost center or department per cost category, it is important to process these methods in the order indicated above. This ensures that the allocation methods are used last after more specific methods have been processed. More than one method per department is made possible by using an offset methodology within each method. An offset methodology refers to the creation of pseudo-accounts in the CGL that captures the results of a calculation, and then provides the remaining dollars to be processed by a subsequent costing process.