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Understanding Traditional D.M.E. and Turn-Over Rates
[By Staff Reporters]
Healthcare inventory represents tangible medical items used in the delivery of healthcare services, or for patient use and resale, or durable medical equipment [DME]. A certain quantity of safety stock should always be available. Inventory ranges from normal administrative office supplies to highly specialized chemicals and reagents used in the clinical laboratory.
Capital Supplies
Inventory should be distinguished from capital supplies, such as major equipment, instruments, and other items that are not used up faster than inventory or related inventory wastes.
Understanding Inventory Turnover
Historically, asset utilization ratios provided information on how effectively the enterprise used its inventory assets to produce revenues, or deplete its cash. For example, the inventory turnover ratio (ITR) determines the total volume of inventory turnover (change) during a pre-determined accounting period (month or quarter). It is defined as cost of inventory purchased for the period, divided by average inventory (AI) at cost.
Supply Chain Management
Dunn and Bradstreet, the supply chain management and consulting company; does not provide exact comparatives for private healthcare ITR. Nonetheless, ITR is useful as an internal performance indicator of inventory turnover speed and cash flow enhancement. Currently however, for public hospitals, 60 – 75 days is estimated to be the average time for inventory turnover.
Assessment
The main problem with traditional ITR, similar analyses such as AI, and the usual inventory costing methods (e.g., last-in first-out, first-in first-out, specific identification, average costs), and even just-in-time inventory costing, is that they do not embrace supply chain inventory management models. This occurs because sources of profit or loss are not recognized in the traditional inventory cost accounting equation:
Cost of goods sold = beginning inventory + net purchases – ending inventory.
Conclusion
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Filed under: Accounting, iMBA, Inc., Practice Management, Recommended Books | Tagged: average inventory, cost accounting, DME, durable medical equipment, first-in, first-out, inventory costing, inventory costing methods, inventory turnover ratio, ITR, specific identification, supply chain management | 3 Comments »
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