Costs are fundamental concepts in business and many other fields. A good analysis of costs reveals the financial position of a company or organization and determines future performance. Losses and profits emanate from costs incurred during production of a product or in offering certain services say in a hospital. Product costing is the process of monitoring and analyzing different expenses in the production of products and services. It is considered as the backbone of a growing business in terms of evaluating strategies and a measure of growth (McNair, 2007). This explores some of the fundamental cost drivers and how each respective technique can be applied to reduce costs within a health organization.
It is important to note that costs can be divided into two major categories as being direct or indirect expenses. One of the common principles of product is Activity-based costing denoted as ABC. This usually defines the costs of an organization based on particular activities. ABC lays its main focus on events of an organization which result into costs most of which could be significantly reduced. In a healthcare organization, the use of ABC approach facilitates the understanding of costs which are mainly associated with diagnostic tests of patients and other factors which influence cost like labor (Fahrenbach, 1999). It can be quiet instrumental in helping a health organization achieve its set objectives with reduced or reasonable costs.
According to analysts, activities play a pivotal role in the coordination of raw materials, skills and technology which is involved in the entire process of healthcare delivery. They further describe the main purpose of an organization, how resources are utilized and the ultimate outcome of the entire process. A healthcare organization can therefore begin using the ABC system by identifying the main activities of the organization together with process involved like pharmacy and outpatient nursing. Identification of activities as a way of developing the ABC may be done through several approaches three of which are quite essential. These three approaches are activity mapping, activity analysis and bill of activities. Activity mapping usually involves mapping of organization activities in a demonstrative sequence. Activity analysis revolves around the determination and assigning of time value to different activities. On the other hand, bill of activities generates costs for every major activity of an organization (Fahrenbach, 1999). Computation of overhead and secondary events usually takes place upon completion of the above mentioned three steps. The construction of a cost schedule is designed to monitor the flow of intended activities within an entire a healthcare activity.
Another product costing principle which is very significant in healthcare organizations is price-led costing. This mainly focuses on priority of activities with regard to the total expenditure expended in adopting a given healthcare activity. Although all activities may be viable and relevant to a healthcare, this principle recognizes the fact that the general cost of an event significantly determines the level of organizational costs as either low or high. A thorough analysis of the economic benefits and the opportunity cost of a given activity is quiet important in costing reduction and priority led healthcare management. It reduces healthcare costs by eliminating and ignoring non economical activities being viewed as productive (Fahrenbach, 1999).
Marginal costing is also essential in reducing costs in healthcare organizations. Many decision makers are usually interested in analyzing costs of various interventions. These interventions are then compared with costs and benefits of other alternatives before a final decision is made. Comparison between existing and new interventions is done in order to determine their costs and benefits before adopting one of them. When newer and existing interventions are compared, the difference in their costs or benefits gives an indication of the most convenient option. For instance, the management of a healthcare may consider hiring more nurses to improve the running of a facility. However, a final decision is only reached by comparing the costs and benefits of the current staff of nurses to the expected change after hiring of new staff. Although it may be difficult to calculate marginal costs, experts argue that this process is quite important in cutting down costs through profit and cost comparison. By dividing costs by expected benefits, a healthcare management is able to establish a cost effectiveness ratio.
Target costing is an equally important principle of product costing. It drives the cost of various products and services in business through rationalized cost management and profit evaluation. It encompasses a number of principles which include price-led costing, focus on design, focus on customers, value-chain and cross-functional participation (Ansari, Bell & Swenson, 2006). The focus on customers as one of the principles of target costing ensures customer quality requirements, time and cost. All these are usually incorporated in the processes aimed at giving guidelines towards cost analysis. The cost of providing such features has to be less than their value in order for an organization to adopt them. The design of a product is also important in cost control. Engineering changes are therefore supposed to take place before the process of producing a product in order to lower costs.
Another fact about target costing in health care cost reduction is that it helps to maintain good health among staff members. In other words, it aims at ensuring low costs for not only customers but also an organization’s staff (Ansari, Bell & Swenson, 2006). According to this principle, there is every point for a healthcare organization to promote the health status of its employees. Just like customers who seek medical attention, health workers are also supposed to be a sound state of well being. It ensures effectiveness in their service delivery and lowers costs which are usually high when workers are not healthy. Target costing in healthcare organization focuses on the wellness of health workers through programs that aimed at promoting good health among employees and their family members. It incorporates programs like immunization and baby care which augment good health and lowering costs. Apart from these, lifecycle costing evaluates impact of a given product or service. Health organizations need to investigate possible effects of a particular service before offering to reduce costs which may be incurred.