This Issue - Icwai

COST COST COST ACCOUNTING
ACCOUNTING
A
major challenge for the continued viability
of hospitals is the development of relevant
and accurate cost information based on which
strategic, pricing and management decisions can be
made. In India, health care financing is increasingly
getting more complex with the rapid advances in the
medical technology in the last one decade. This had
led the hospitals with high percentage of fixed costs,
owing to buying of advanced medical equipments and
setting up of laboratories. Hospitals need to shift their
focus from treating illness of individual patients to
managing the overall health status of the enrolled
patients throughout the continuum of care (Ralph and
Ramsey, 1994).
In the light of the prevailing and future health care
trends, a hospital’s cost accounting system should
serve three purposes:
(a) promoting cost efficiency without compromising
the service quality
(b) allow the hospitals to maximise its resources
through product and service line management
(c) highlight the opportunities for continuous
improvement of the hospital’s operations.
In order to achieve the above, cost efficiency,
product and service line management and continuous
improvement hospital needs to consider implementing
Activity Based Costing (ABC) system.
Activity Based Costing
Activity Based Costing—popularly known as ABC
represents an opportunity to detail indirect costs for
specific activities. It is an extremely valuable tool in
financial decision making process, especially in the
health care segments. The ABC is an approach to
determine the costs of products (patients) or product
lines (groups of similar patients). This method of
costing improves the accuracy of determining the
costs by more accurately assigning overhead costs on
a cause-and-effect basis. This method of costing is
useful for health care industries as they accurately
determine the cost drivers of each element of a
particular procedure.
Activity is the process or procedures that cause
work to be performed within an organisation. An
Application of Activity Based Costing
for Health Care Industries
P. Saravanan*
N. Sivasankaran**
activity represents unique combination of inputs (i.e.
people, technology, materials) brought together to
produce outputs (i.e. products or services). For
instance, in the hospital setting, surgical procedures
performed in operation theatres (OT) represent
activities. The inputs are medical personnel (surgeons,
anaesthesiologists, nurses) or technology (patient
monitoring equipment, life supporting systems) and
surgical supplies (latex gloves, gauze pads, and
bandages) are combined for the successful patient
outcomes.
To ensure how well is the activity being performed
we need to do an activity analysis in terms of total
cost, time, or quality. In other words, activity analysis
helps the hospital to identify value-added versus nonvalue
added activities. So from that information, the
hospital can simplify, improve or eliminate activities
and processes.
Continuous improvement is possible by means of
identifying the factors that drive costs. A cost driver
is any event that causes a change in the total cost of
an activity. Cost driver by their very nature indicate
where action or change is required for further
improvement.
What ABC Can Do for Hospitals?
As documented earlier, ABC would help hospitals
in the promotion of cost-efficient operations and in
the management of product and service lines. If a
hospital’s cost estimates are too high or too low, it
risks making incorrect and, perhaps, disastrous
business decisions. By providing more accurate costs,
ABC system improves the decision made regarding
case mix, procedure utilisation and pricing. This
system also identifies the activities that need
improvement. To improve the management of any
activity successfully, the hospitals must understand
the activity’s resource consumption, outputs and
quality of performance. From support and sustaining
activities (i.e. meal preparation, facilities management)
* Assistant Professor, Indian Institute of Management,
Shillong
**Associate Professor, Indian Institute of Management,
Shillong
760 The Management Accountant |September 2011