REVENUE AND COST ACCOUNTING
This is a
Accounting gives the management the information
regarding the financial position of the business, such
as;
 profit and loss
 cost and earnings
 liabilities and assets, etc.
Business – An organization or economic system
where goods and services are exchanged for one
another or for money. Every business requires some
form of investment and enough customers to whom
its output can be sold on a consistent basis in order to
make a profit.
Types of business according to ownership structures
1. Proprietorship – is a business that is owned
by a single individual who has full control and
authority. A sole proprietorship must apply for a
business trade name and be registered with the
Department of Trade and Industry.
2. Partnership – is a business that is owned by
two or more individuals or partners. Under the
Civil Code of the Philippines, a partnership is
considered as juridical person, having a separate
legal personality from that of its owners
(partners). A partnership with more than three
thousand pesos (P3,000.00) capital must register
with Securities and Exchange Commission (SEC).
Partnerships are generally treated like
corporations for income tax computation
purposes.
3. Corporation – is a business that is owned by
its shareholders (natural or juridical persons).
regulated by the SEC with a personality separate
and distinct from that of its stockholders. The
liability of the shareholders of a corporation is
limited only to the amount of their share capital.
must be registered with the SEC. Minimum paid
up capital is P5,000. A corporation in the
Philippines can either be stock or non-stock
company regardless of nationality.
a. Stock Corporation – This is a corporation
with capital stock divided into shares and
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of the shares held.
b. Non-stock Corporation.
corporation organized principally for public
purposes such as foundations, charitable,
educational, cultural, or similar purposes and
does not issue shares of stock to its members.
THE CORPORATION CODE OF THE PHILIPPINES
[Batas Pambansa Blg. 68]
TITLE I
GENERAL PROVISIONS
Definitions and Classifications
Section 1. Title of the Code. - This Code shall be
known as "The Corporation Code of the Philippines".
Sec. 2. Corporation defined. - A corporation is an
artificial being created by operation of law, having
the right of succession and the powers, attributes
and properties expressly authorized by law or
incident to its existence.
Sec. 3. Classes of corporations. - Corporations
formed or organized under this Code may be stock
or non-stock corporations. Corporations which have
capital stock divided into shares and are authorized
to distribute to the holders of such shares dividends
or allotments of the surplus profits on the basis of
the shares held are stock corporations. All other
corporations are non-stock corporations.
Sec. 4. Corporations created by special laws or
charters. - Corporations created by special laws or
charters shall be governed primarily by the
provisions of the special law or charter creating
them or applicable to them, supplemented by the
provisions of this Code, insofar as they are
applicable.
Board Directors/Trustees/Officers
Sec. 23. The board of directors or trustees. -
Unless otherwise provided in this Code, the
corporate powers of all corporations formed under
this Code shall be exercised, all business conducted
and all property of such corporations controlled and
held by the board of directors or trustees to be
elected from among the holders of stocks, or where
there is no stock, from among the members of the
corporation, who shall hold office for one (1) year
until their successors are elected and qualified.
Non-Stock Cororations
 Sec. 87. Definition. - For the purposes of this Code, a
non-stock corporation is one where no part of its
income is distributable as dividends to its
members, trustees, or officers, subject to the
provisions of this Code on dissolution: Provided,
That any profit which a non-stock corporation may
obtain as an incident to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which
the corporation was organized, subject to the
provisions of this Title.
The provisions governing stock corporation, when
pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific
provisions of this Title. (n)
 Sec. 88. Purposes. - Non-stock corporations may be
formed or organized for charitable, religious,
educational, professional, cultural, fraternal,
literary, scientific, social, civic service, or similar
purposes, like trade, industry, agricultural and
like chambers, or any combination thereof,
subject to the special provisions of this Title
governing particular classes of non-stock
corporations. (n)  legal entity CLINICAL LABORATORY to survive
Sec. 14. Contents of the articles of incorporation. -
All corporations organized under this code shall file
with the Securities and Exchange Commission
articles of incorporation in any of the official
languages duly signed and acknowledged by all of the
incorporators, containing substantially the following
matters, except as otherwise prescribed by this Code
or by special law:
1-10:name of corp; specific purpose/s; place of
principal office must be in the Phil; term of existence;
names, nationalities and residences of incorporators;
number of directors or trustees, not less than 5 nor
more than 15; …
Of non-stock- amount of capital, names, nationalities,
residences of contributors and amount contributed
by each; AND
Stock corp: Articles of Incorporation PLUS sworn
statement of the treasurer
“If you choose a corporation as the form of legal
ownership, it is critical to open a bank account in the
name of the company and deposit all revenue and
pay all bills from this new account. Any personal
revenue or bills must not be deposited into or paid
from the corporation's account, or it could be argued
that the company is not legitimate, and someone
trying to get at the owner's assets could assert there
is not an official corporation. This is referred to as
"piercing the corporate veil" and will open up
owners of a corporation to personal business
liability. “
Once a legal entity is started, it is accountable to
the government for all relevant taxes; includes income,
employment, sales, and other business taxes.
TAXES : government to survive
Different classifications of business
1. Service business – this provides intangible
goods or services to customers. It usually
generates profit by charging for labor or other
services rendered to consumers, government or
other companies.  Below are examples of
service businesses:
Laboratory services of free standing clinical
laboratories
2. Merchandising business –
3. Manufacturing business –
4. Other businesses. Examples are agriculture
and mining companies. These companies are
engaged in producing or exploration of raw or
natural materials, such as plants and minerals.
ACCOUNTING SPECIALTIES
1. Financial accounting is a specialized branch
of accounting that keeps track of a company's
financial transactions. Using standardized
guidelines, the transactions are recorded,
 summarized, and presented in a financial decisions and formulating overall policies and
report or financial statement such as an long-range plans
income statement or a balance sheet. On a 3. external reporting to stockholders,
routine schedule. It's important to point out government, and other outside parties
that the purpose of financial accounting is not
to report the value of a company. Rather, its 3 FINANCIAL ACCOUNTING STATEMENTS
purpose is to provide enough information for  Balance Sheet
others to assess the value of a company for  Income Statement  most common
themselves.  Statement of Cash Flows
2. Cost accounting (managerial) is the most
basic element of the laboratory's financial DIFFERENCE BETWEEN INCOME STATEMENT AND
management structure. The budgeting FUNDS FLOW STATEMENT
process of a firm providing planning and INCOME FUNDS FLOW
operational information to managers. STATEMENT STATEMENT
Historically, cost accounting in the A summary of
nonmedical world referred to accumulating total income
The statement of
and assigning costs to units of production and total
Meaning changes in
and departments, primarily for inventory expenses and
financial position.
valuation and income determination. losses of a
In the health industry, microcost accounting particular period.
is distinguishable from macrocost To ascertain the
To identify how
(management/internal) accounting and profit earn or
Objective the profit has
serves multiple purposes. loss suffered by a
been utilized.
 Microcost accounting pertains to firm.
gathering and providing information Prepared on the Prepared on the
for decision making. The range of Preparation basis of nominal basis of balance
decisions include managing recurring accounts. sheet.
Helpful in Helpful in
operations, making nonrecurring
Measuremen measuring the determining the
strategic decisions, and formulating
t profitability of a net changes in
major organizational policies.
firm. working capital.
 Macrocost accounting fulfills the
legal requirements of reporting to
DIFFERENCE BETWEEN BALANCE SHEET AND
stockholders, auditors, governmental
FUNDS FLOW STATEMENT
agencies, and other external parties.
FUNDS FLOW
BALANCE SHEET
STATEMENT
BASIC ACCOUNTING PRINCIPLES
statement if
Primary task of the accounting process: - provide
statement of changes in
financial information
Meaning assets, liabilities assets, liabilities
and capital. and capital
Effective accounting system – provides 3 types of
accounts.
information: to ascertain the
1. internal reporting to managers - for use in to ascertain the
sources and
planning and controlling current operations Objective financial position
application of
2. internal reporting to managers – for use in of a firm.
funds.
strategic planning, i.e. making special
prepared with the prepared with the
Preparation
help of trial help of balance
 sheets of two CASH FLOW FUNDS FLOW
balance. subsequent STATEMENT STATEMENT
dates. based on the changes
provides the based on in working
provides static changes in
Informatio narrow capital which
view of financial assets, liabilities
n concept of considers both the
affairs. and capital Concept funds, which changes in cash as
accounts. considers well as other
changes in components of
cash. current assets and
current liabilities.
DIFFERENCE BETWEEN CASH FLOW STATEMENT
AND FUNDS FLOW STATEMENT Basis of prepared on prepared on accrual
Preparation cash basis basis
does not
require use of
changes in
working
capital requires to use
Working because all the of separate statement
Capital changes in of changes in net
assets and working capital.
liabilities are
summarizes in
cash flow
statement
considers only
considers those
those
transactions that are
transactions
Link linked with flow of
that are
funds along with
linked with
actual cash.
flow of cash
more useful in
more useful in long-
short term
Usefulness term analysis
analysis and
of financial planning
cash planning

Double Entry and the Accrual Basis of Accounting

DOUBLE ENTRY
 At the heart of financial accounting is the
system known as double entry
bookkeeping (or "double entry accounting").
Each financial transaction that a company
makes is recorded by using this system.
 means that every transaction affects at least
two accounts. For example, if a company
borrows $50,000 from its bank, the
 company's Cash account increases, and the position of a company is measured by the
company's Notes Payable account increases. following items:
 Double entry also means that one of the  Assets (what it owns)
accounts must have an amount entered as  Liabilities (what it owes to others)
a debit, and one of the accounts must have an  Owner's Equity (the difference
amount entered as a credit.  between assets and liabilities)
 For any given transaction, the debit amount
must equal the credit amount. THE ACCOUNTING EQUATION
 After you have identified the two or  The accounting equation (or basic accounting
more accounts involved in a business equation) offers us a simple way to
transaction, you must debit at least understand how these three amounts relate
one account and credit at least one to each other.
account.  The accounting equation for a sole
 To debit an account means to enter an proprietorship is:
amount on the left side of the account.
To credit an account means to enter
an amount on the right side of an
account.
 Debit means left (DEAL)
 The accounting equation for a corporation
 Credit means right (GIRLS)
is:
 Generally these types of accounts
are increased with a debit: (DEAL)
o Dividends (Draws)
o Expenses
ASSETS
o Assets
 are a company's resources—things the
o Losses
company owns.
 Generally the following types of  Examples of assets include cash, accounts
accounts are increased with a credit: receivable, inventory, prepaid insurance,
o Gains investments, land, buildings, equipment, and
o Income goodwill.
o Revenues  From the accounting equation, we see that
o Liabilities the amount of assets must equal the
o Stockholders' (Owner's) Equity combined amount of liabilities plus owner's
 To decrease an account you do the opposite (or stockholders') equity.
of what was done to increase the account. For  Examples:
example, an asset account is increased with a  Cash
debit. Therefore it is decreased with a credit  Petty Cash
 The advantage of double entry accounting is  Temporary Investments
this: at any given time, the balance of a  Accounts Receivable
company's asset accounts will equal the  Inventory
balance of its liability and stockholders' (or  Supplies
owner's) equity accounts.  Prepaid Insurance
 From the large, multi-national corporation  Land
down to the corner beauty salon, every  Land Improvements
business transaction will have an effect on a  Buildings
company's financial position. The financial  Equipment
  Goodwill
Contra Assets  are asset accounts
with credit balances. (A credit balance in an asset
account is contrary—or contra—to an asset account's
usual debit balance.) Examples of contra asset
accounts include:
 Allowance for Doubtful Accounts
 Accumulated Depreciation-Land
Improvements
 Accumulated Depreciation-Buildings
 Accumulated Depreciation-Equipment
 Accumulated Depletion
LIABILITIES
 are a company's obligations—amounts the
company owes.
 Examples of liabilities include notes or loans
payable, accounts payable, salaries and wages
payable, interest payable, and income taxes
payable (if the company is a regular
corporation).
 Liabilities can be viewed in two ways:
1. as claims by creditors against the
company's assets,
2. a source—along with owner or
stockholder equity—of the company's
assets.
OWNER’S EQUITY/STOCKHOLDER’S EQUITY
 the amount left over after liabilities are
deducted from assets:
Assets - Liabilities = Owner's (or Stockholders')
Equity.
 also reports the amounts invested into the
company by the owners plus the cumulative net
income of the company that has not been
withdrawn or distributed to the owners.
• If a company keeps accurate records, the
accounting equation will always be "in
balance," meaning the left side should always
equal the right side. The balance is maintained
because every business transaction affects
at least two of a company's accounts.
• For example, when a company borrows money
from a bank, the company's assets will
increase and its liabilities will increase by the
same amount. When a company purchases
inventory for cash, one asset will increase and
one asset will decrease. Because there are two
or more accounts affected by every
transaction, the accounting system is referred
to as double-entry accounting.
• A company keeps track of all of its transactions
by recording them in accounts in the
company's general ledger. Each account in
the general ledger is designated as to its type:
asset, liability, owner's equity, revenue,
expense, gain, or loss account.
• Recording of financial activity
• Financial accounting is required to follow
the accrual basis of accounting (as opposed
to the "cash basis" of accounting). Under the
accrual basis, revenues are reported when
they are earned, not when the money is
received.
• Similarly, expenses are reported when they
are incurred, not when they are paid. For
example, although a magazine publisher
receives a $24 check from a customer for an
annual subscription, the publisher reports as
revenue a monthly amount of $2 (one-twelfth
of the annual subscription amount). In the
same way, it reports its property tax expense
each month as one-twelfth of the annual
property tax bill.
• By following the accrual basis of accounting, a
company's profitability, assets, liabilities and
other financial information is more in line with
economic reality. (To learn more on achieving
the accrual basis of accounting, see
the Explanation of Adjusting Entries.)
• If financial accounting is going to be useful, a
company's reports need to be credible, easy to
understand, and comparable to those of other
companies. To this end, financial accounting
follows a set of common rules known
as accounting standards or generally
accepted accounting principles (GAAP,
pronounced "gap").

FINANCIAL ACCOUNTING STATEMENTS
1. Balance Sheet
 also known as the statement of
financial position and it reflects the
accounting equation
 Within the chart of accounts the
balance sheet accounts are listed first,
followed by the income statement
accounts. In other words, the accounts
are organized in the chart of accounts
as follows:
 Assets
 Liabilities
 Owner’s (Stockholder’s)
Equity
 Revenues or Income
 Expenses
 Gains
 Losses
Classified Balance Sheets  means that the
balance sheet accounts are presented in
distinct groupings, categories, or
classifications. The asset classifications and
their order of appearance on the balance
sheet are:
 Current Assets
 Investments
 Property, Plant, and Equipment
 Intangible Assets
 Other Assets
2. Income Statement
 the financial statement that reports a
company's revenues and expenses
and the resulting net income. While
the balance sheet is concerned
with one point in time, the income
statement covers a time
intervalor period of time. The income
statement will explain part of the
change in the owner's or
stockholders' equity during the time
interval between two balance sheets.
 The income statement reports a
company's profitability during a
specified period of time. The period of
time could be one year, one month,
three months, 13 weeks, or any other
time interval chosen by the company.
 The main components of the income
statement are revenues, expenses,
gains, and losses. Revenues include
such things as sales, service revenues,
and interest revenue. Expenses
include the cost of goods sold,
operating expenses (such as salaries,
rent, utilities, advertising), and
nonoperating expenses (such as
interest expense). If a corporation's
stock is publicly traded, the earnings
per share of its common stock are
reported on the income statement.
3. Statement of Cash Flows
FINANCIAL STATEMENTS
Financial accounting generates the following general-
purpose, external, financial statements:
• Income statement (sometimes referred to as
"results of operations" or "earnings
statement" or "profit and loss [P&L]
statement")
• Balance sheet (sometimes referred to as
"statement of financial position")
• Statement of cash flows (sometimes
referred to as "cash flow statement")
• Statement of stockholders' equity
REVENUE SOURCES
Key Metrics Of Lab Profitability
 The first priority in increasing lab
profitability is maximizing revenues. And
that starts with determining net sales.
Net Sales
 Net sales represent the amount of gross
sales generated by a company minus any
deductions for returns, contractual
allowances, damaged or missing goods and
any allowed discounts. The sales number
reported on a company’s financial statements
 is a net sales number, reflecting these
deductions. Therefore, net sales give a more
accurate picture of the actual sales generated
by the company, or the cash that it expects to
receive.
In addition to maximizing net sales, reducing
operating costs many labs still struggle with precise
accounting of net revenue. In fact, many labs have
trouble understanding their true top line revenue
and as a result their ultimate profitability due in large
part to inaccurate accounting of contractual
allowances.
Labs need to accurately determine contractual
allowances, price concession percentages, and bad
debt percentages for FASB compliance. Revenue cycle
management process can help adhere to these
requirements. Cash flow will also improve through
access to real time accounts receivable information
and a proactive collection process. That said, as
billing, collections, and compliance continue to grow
in complexity, it is critical to have a comprehensive
RCM system and an expert partner to stay ahead of
the changes.
Traditional billing systems are no longer adequate to
manage the complexities of today’s laboratory
business. Labs need comprehensive RCM systems
that are built on a solid financial foundation with
intelligent automation, referential integrity, and
possessing the financial sophistication to provide
general ledger ready, compliant financial reporting.
This requires greater drilldown detail, monitoring
capabilities, and adaptability to ever-changing
requirements.
Laboratory leaders not only need to have a firm
handle on revenue, but also need the tools to be able
to identify when the lab is being chronically under-
reimbursed. Having this understanding — and the
data to back it up — supports the pursuit of
additional collections, as well as for payor contract
renegotiation.
To effectively manage business decisions and
improve clinical outcomes, labs need to precisely
measure results and be able to compare them to
internal goals and industry benchmarks. Business
intelligence is the key to delivering that visibility.
System Capabilites
 Systems capable of only handling
straightforward billing and accounts
receivables are not only outdated, but
dangerous to the business of running a lab.
Intelligent automation is the key to consistent
and standardized claims exception handling.
This relieves the lab from relying on the manual
decisions of the billing clerk in a very complex
regulatory environment.
 Even the largest labs that have grown largely
through acquisitions find themselves struggling
with inadequate levels of billing, coding,
collections and compliance system automation.
They face the choice of hugely expensive
system rebuilds or finding adaptable solutions
that address these challenges.
 The complexity of laboratory revenue cycle
management is unmatched in all of healthcare.
Laboratories routinely have thousands of tests
they perform and the list is always growing.
Each of these tests brings its own coding and
billing challenges.
 Laboratory leaders can increase the
profitability of their business by recovering
more revenue
Profit
 is a center which generates revenues, profits,
and costs.
 For example, we can take sales department.
Sales department of an organization is a
profit center because sales department
ensures how much revenues will be earned,
how much expenses should organization
incur to sell the products/services, and how
much profits would the company make as a
result.
 Profit centers are the reasons for which
business is run. Without profit centers, it
would be impossible for a business to
perpetuate.
 Of course, profit centers are backed up by
cost centers to generate profits, but the
 functions of profit centers are also
noteworthy.
Cost Center
 a subunit (or a department) which takes care
of the costs of the company. The primary
functions of cost center are to control the
costs of the company and to reduce the
unwanted costs the company may incur.
 For example, customer service facility may
not create direct profits for the company, but
it helps control the costs of the company (by
understanding what customers are struggling
with) and also facilitates in reducing the costs
of the organization.
 cost centers help profits centers in directing
the functions of the company.
Diagnosis-Related Groups (DRG)
 Prospective payment system adopted by 3rd
party payer: PhilHealth, GSIS, SSS, Health
insurances
 Eg. The hospital receives 2000php from
PhilHealth for all services rendered to a
patient admitted with Dengue. If the
treatment costs exceeds 2000php, the
hospital loses money. If the cost is less than
2000 php, it makes a profit
 Although DRG-based payment systems are
now mainly understood as a reimbursement
mechanism, their original purpose was to
enable performance comparisons across
hospitals.Today DRGs are used primarily by
purchasers to reimburse providers for acute
inpatient care, but in principle they can also
be used to reimburse them for non-acute
inpatient care.   surcharge/cost-plus – used in the lab
SOURCES OF REVENUE
 Hospital –based laboratories: revenue
divided into 2 sources
 Inpatient
 outpatient
 Today’s view on revenue: as coming either
 Captive revenue tests – patients have
no choice of location; procedures
requested through the hospital for
inpatients, outpatients, ER patients
 Discretionary tests – client may select
location; patients may be referred by
physicians, outpatient depts,
insurance companies, industrial
outreach programs
ACCOUNTING CODES
 Assigned accounting codes in all line ITEMS,
developed by the accounting dept to simplify
recrd-keeping.
 Eg. Last 3 digits may designate the laboratory
FEE AND PRICE SETTING
 Running a lab is not different from running
any other business: i.e. income must exceed
expenses or the enterprise fails
 In health care, prices are either set in advance
by govt agencies or negotiated with insurance
carriers with pre-established guidelines for
reimbursement.
REIMBURSEMENT PROGRAMS
 Labs and healthcare organizations receive
most of their revenue from direct payment by
patients and insurance companies;
prenegotiated payment plans llike DRG and
other prospective payment plans; and 3rd
party plans that pay a set amount for specific
services, regardless of charge
RATE SETTING TECHNIQUES
 2 methods:
 -hourly rates
ro charge for reference or send-out
tests and to set-inhouse test fees
 e.g. a reference lab charges a hosp lab 500
php to perform a test. The hosp has
established policy od marking up the fee by
100 per cent. So hosp charges the patient
1000 php
WEIGHTED-VALUE BASIS
 More theoretical than practical, for use in the
laboratory based on the financial goats fo the
lab NOT on the individual cost of delivering a
specific service
 Weighted Value (Weighted Expected Revenue
Amount) of Opportunities. It's the Expected
Value of an Opportunity weighted with its
Chance of Success. Both values can be
maintained per Opportunity. The Expected
Value represents the estimated value of the
deal if it will be won. The Chance of Success
represents the probability to win the deal.
Both values might change during the whole
sales cycle.
 Opportunity Management only in industries
with long pre-sales cycles.
HISTORICAL METHOD
 Raising of prices annually by a certain
percentage, based on the rate of inflation and
income needs. The reason of the lost of
surcharges
COMPETITION AND RATE CONTROLS
 Factors determine what the lab actually
receive or charge for a test.
 Most labs have a sliding scale based on
determinants as volume, method of payment,
competition from other labs (may receive six
diff amounts for doing a CBC on an
outpatient)
REVENUE BUDGET FOR THE LAB
 Growth factor projection (year-to-date
records) - Forecast of future volume for
revenue budgeting purposes.
 e.g. if the volume of testing for the lab has an
average of 8 pc for the past 3 years, lab man
may determine that this trend will continue.
Adjusted for new services offered, hosp
expansion plans, closing of beds, or new
industries that may increase the population
of town
PATIENT DAY FORECAST
 Projects the amount of revenue the lab will
receive during the next budgeting period,
prediction of volume is necessary, obtained
from the master budget for the lab (growth
factor)
 E.g. patient days projection (each day a
patient stays in the hosp overnight)
 100 census ave each day of sept = 100 x 30 =
patient days for the month
REVENUE BUDGET
 The final step in preparing a revenue budget
for the lab: obtain an estimate of test volume
and income
 -Total number of tests performed, gross
revenue for the lab, patient days for the
current budget period if lab is hosp-based.
 may be used to calculate 2 ratios: tests per
patient days for hosp-based lab and revenue
per test to determine the volume and gross
revenue of thea lab for the coming budget
year
FORMULA FOR RATIO
ACCOUNTING FOR LABORATORY COSTS
 for allocating and controlling expenditures,
surveys methods used to evaluate the nature
and behavior of lab costs, budget techniques
for projecting spending levels, role costs in
performing feasibility studies or evaluating
lab services
A. NATURE OF COSTS
 To track where expenses are incurred
and assign responsibility for
expenditure; referred as managerial
accounting
 While financial accounting supplies
info to outside parties
  Cost accounting is focused on the
operation of the business
B. BEHAVIOR OF COST
 Defining and controlling costs
approached and analyzed fro 2
directions:
 By examining the influence of
variations in testing volume
(production)
 Or looking at the expenses in
performing individual procedure
(billable procedure)
Variability of Volume
 A method of studying the behavior of lab
costs to evaluate the impact of costs based on
the workload of the institution
 Here: costs of operating a lab are divided into
3 categories based on sensitivity to
production volume or magnitude of
variability:
 FIXED COSTS - expenses do not
fluctuate when work volume changes
on a daily basis e.g. instrument,
contracts, services, equipment costs
 SEMIVARIABLE COSTS (marginal
costs) – costs rise based on more
gradual changes in workload e.g.
hiring of additional phleb i.e. salary
costs go up; spending money is based
on the marginal additional benefit the
lab expects to receive
 VARIABLE COSTS - Respond directly
to changes in workload: as volume of
work increases, expenses rise in a
direct and linear relationship
Costs are most manageable and
adjustable in a short-term basis
 E.g. labor costs and supplies
 BILLABLE PROCEDURES
 Direct costs
 Indirect costs
C. COST BUDGETING
 Accounting codes: for budgeting and
recording purposes, cost itens are
assigned an accounting code included
in the chart of accounts
 Cost projection and budget prep: major
techniques for forecasting need to be
included in the budgeting process;
percentage of revenue, index ratios,
actual expected annual costs
 Cost comparison standards:
comparison with other laboratories
BREAK-EVEN ANALYSIS
 Break Even Analysis in economics, business,
and cost accounting refers to the point in
which total cost and total revenue are equal.
A break even point analysis is used to
determine the number of units or dollars of
revenue needed to cover total costs (fixed
and variable costs).
 Formula:
Break even quantity = Fixed costs / (Sales
price per unit – Variable cost per unit)
Where:
o Fixed costs are costs that do not
change with varying output (i.e.
salary, rent, building machinery).
o Sales price per unit is the selling
price (unit selling price) per unit.
o Variable cost per unit is the variable
costs incurred to create a unit.
 It is also helpful to note that sales price per
unit minus variable cost per unit is
the contribution margin per unit. For
example, if a book’s selling price is $100 and
its variable costs are $5 to make the book,
$95 is the contribution margin per unit and
contributes to offsetting the fixed costs.
 Example
Colin is the managerial accountant in charge
of Company A, which sells water bottles. He
previously determined that the fixed costs of
Company A consist of property taxes, a lease,
and executive salaries, which add up to
$100,000. The variable costs associated with
producing one water bottle is $2 per unit. The
water bottle is sold at a premium price of
$12. To determine the break even point of
Company A’s premium water bottle:
Break even quantity = $100,000 / ($12 – $2)
= 10,000
Therefore, given the fixed costs, variable
costs, and selling price of the water bottles,
Company A would need to sell 10,000 units of
water bottles to break even.
GRAPHICALLY REPRESENTING THE
BREAK-EVEN POINT
 The graphical representation of unit
sales and dollar sales needed to break
even is referred to as the break even
chart or Cost Volume Profit
(CVP) graph. Below is the CVP graph
of the example above:
 Interpretation:
 Explanation:
 The number of units is on the X-
axis (horizontal) and the dollar
amount is on the Y-axis (vertical).
 The red line represents the
totalfixed costs of $100,000.
 The blue line represents revenue
per unit sold. For example, selling
10,000 units would generate
10,000 x $12 = $120,000 in
revenue.
 The yellow line represents total
costs (fixed and variable costs).
For example, if the company sells
0 units, the company would incur
$0 in variable costs but $100,000
in fixed costs for total costs of
$100,000. If the company sells
10,000 units, the company would
incur 10,000 x $2 = $20,000 in
variable costs and $100,000 in
fixed costs for total costs of
$120,000.
 The break even point is at 10,000
units. At this point, revenue would be
10,000 x $12 = $120,000 and costs
would be 10,000 x 2 = $20,000 in
variable costs and $100,000 in fixed
costs.
 When the number of units exceeds
10,000, the company would be
making a profit on the units sold. Note
that the blue revenue line is greater
than the yellow total costs line after
10,000 units are produced. Likewise,
if the number of units is below
10,000, the company would be
making a loss. From 0-9,999 units, the
total costs line is above the revenue
line.
As illustrated in the graph above, the point at
which total fixed and variable costs equal to
total revenues is known as the break even
point. At the break even point, a business
does not make a profit or loss. Therefore, the
break even point is often referred to as the
‘no-profit’ or ‘no-loss point.’
The break even analysis is important to
business owners and managers in
determining how many units (or revenues)
are needed to cover fixed and variable
expenses of the business.
Therefore, the concept of break even point is
as follows:
1. Profit when Revenue > Total Variable
cost + Total Fixed cost
2. Break-even point when Revenue =
Total Variable cost + Total Fixed cost
3. Loss when Revenue < Total Variable
cost + Total Fixed cost