Select a technique/concept regarding Cost Management and Cost Systems and develop a real-
world application paper. Select a company that you work for now or have worked for in the past,
or a company in your community of which you have sufficient knowledge. Show how the
selected technique/concept would be applied to that particular business in its strategic allocation
of financial resources
Full Answer Section
Understanding Activity-Based Costing (ABC)
Traditional costing methods, often employed in public hospitals, tend to allocate indirect costs (overheads) broadly, for example, based on patient days or bed occupancy.
This can obscure the actual cost of specific services, leading to inaccurate pricing, inefficient resource use, and suboptimal strategic decisions.
Activity-Based Costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Instead of allocating overheads as a single pool, ABC traces costs to activities, and then activities to cost objects (e.g., specific medical procedures, patient diagnoses, or outpatient visits) based on cost drivers. A cost driver is a factor that causes a change in the cost of an activity.
Key principles of ABC relevant to KCGH:
- Identify Activities: Break down the healthcare delivery process into discrete activities (e.g., patient registration, lab test processing, surgical preparation, medication dispensing, nursing care per shift).
- Identify Activity Costs: Determine the resources consumed by each activity (e.g., staff salaries, supplies, equipment depreciation, utilities specific to that activity).
- Identify Cost Drivers: Find the root causes that drive the cost of each activity (e.g., number of lab tests, number of surgical minutes, number of patient consultations, square footage of a unit).
- Allocate Costs to Cost Objects: Assign the costs of activities to the final services or patients based on their consumption of the identified cost drivers.
For KCGH, implementing ABC would move beyond simply knowing the aggregate cost of a department to understanding the cost of a specific appendectomy, a diabetes management program, or an outpatient consultation.