Fixed costs are ones that do not change regardless of factors such as level of volume.

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Fixed costs are ones that do not change regardless of factors such as level of volume. However, fixed costs may be increased or decreased by the facility depending on volume. For example, if the number of patients extremely increases, then additional costs may need to be added such as equipment or added staffing. According to the Commonwealth Fund, the more fixed costs a hospital has — for example, building and equipment expenses, administrative overhead, and stand-by staffing costs — the more lucrative it is for the hospital when volumes are increasing (2022). 

Variable costs on the other hand are directly related to the volume of the facility. Supplies are a great example because as more patients are seen more supplies are needed. Some costs that are generally fixed, such as staffing can be considered variable costs in certain situations. According to Gapenski and Reiter, some health services organizations pay their employees on the basis of the amount of work performed, which converts labor costs from fixed to variable (Gapenski & Reiter, 2015). 

Healthcare administrators will make many decisions such as staffing or ordering supplies based on these two different kinds of costs. Cost allocation allows for an organization to be able to efficiently predict their expenses and not be surprised by any bills. It also helps in determining exactly where expenses are coming from which can in turn help to come up with ways to reduce these costs. Lastly, utilizing the cost allocation method keeps balance within the facility and ensuring that not one department is utilizing too much of the budget. 

Gapenski, L., & Reiter, K. L. (2015). Healthcare finance: An introduction to accounting and financial management, sixth edition. Health Administration Press.

Hospital global budgets: A promising state tool for controlling health care spending. Commonwealth Fund. (2022, March 22). Retrieved November 5, 2022, from https://www.commonwealthfund.org/publications/issue-briefs/2022/mar/hospital-global-budgets-state-tool-controlling-spending