Question

As the Mayo Clinic was rolling out its response to the coronavirus pandemic, its finance team was trying to figure out how best to classify a reserve of masks and gloves: expense or inventory? The Mayo Clinic ran into the question of how to account for protective gear after it purchased a stockpile in late February to early March. Previously, the hospital system had recognized gear as inventory if it was stored in a warehouse; if the gear were kept at a clinical facility or on a hospital floor, it would be recognized as an expense. The finance team argued that such equipment should be considered inventory even if it weren’t in a warehouse. “They shouldn’t have been expensed.” Do you agree? Why or why not? How would the inventory vs expense classificiation affect Mayo Clinic’s financial statements?

Answer 1

As the Mayo Clinic was rolling out its response to the coronavirus pandemic, its finance team was trying to figure out how best to classify a reserve of masks and gloves: expense or inventory?

That question, among others, has prompted the nonprofit hospital system to overhaul the way it accounts for everything from inventory to labor costs and other expenses.

The fluctuations in Mayo’s revenue and expenses in recent months exposed shortcomings in the way crucial equipment was recorded and recognized on financial statements.

As hospitals across the country try to offset falling revenues as their spending on supplies soars, finance chiefs are making sweeping changes to reduce costs and streamline financial operations.

The Mayo Clinic ran into the question of how to account for protective gear after it purchased a stockpile in late February to early March. Previously, the hospital system had recognized gear as inventory if it was stored in a warehouse; if the gear were kept at a clinical facility or on a hospital floor, it would be recognized as an expense. Faced with the pandemic, the clinic had no choice but to keep the gear close to its medical staff.

Yes I do agree “These weren’t expenses, adding that such equipment should be considered inventory even if it weren’t in a warehouse. “They shouldn’t have been expensed.” The finance team began reclassifying the gear as inventory instead of expenses.

The Mayo Clinic also is looking to revamp the way it accounts for employee benefits after it furloughed thousands of workers in April. It reduced the hours of employees, some of whom were fully furloughed for a limited period, while others were partly furloughed for the rest of the year . The nonprofit uses a pooled-allocation approach, in which it gathers all costs associated with health care, retirement and disability into one cost pool and allocates those costs per employee based on a specific tool for tracking cost reductions.

In this model, when workers are furloughed, it is difficult to track where the benefit reduction or benefit load for an employee is going to go.

To reduce accounting imprecisions, Mayo is looking into reinstituting an approach that would tie costs directly to each employee.