Free Custom « Activity- Based Costing (ABC) » Essay Paper

Statement of the Problem In modern world the population of countries is ageing and this increases the demand for investment in health care. With this, there is an imperative demand for ways to manage the available resources. These methods that are chosen have to incorporate effectiveness and cost studies. The cost analysis of radiological diagnosis and treatment has to be covered including the departmental organization and leadership costs. Activity based costing method for radiology has been made and found to be appreciably more precise than the conservative methods. It provides detailed selective information on cost data for various departmental activities (Laurila, 2002) Laurila analyzed the cost and cost structure of a moderately digitized radiological department and conformist radiology using plain film. The costs were computed by activity based costing as was proposed by Laurila (2002). The results showed that the costs of a partially digitized department exceed those of a conventional radiology. The activity based costing concepts can be used to generate more precise product costs than those obtained in the traditional cost systems. This method can be used to work out radiotherapy costs. Activity based costing is different from traditional accounting and solves the problems associated with it. If implemented in a radiotherapy clinic that at first uses a traditional accounting method, it produces efficient results. The approach allocates indirect costs to products and services. This is done by defining the major actions on which personnel in an organization spend their time (Martin, 2008). Unlike traditional methods, Activity based costing puts into consideration the primary activities as the main functions performed by the clinic. Basically, the model defines the major actions on which human resources in the clinic spend their time. The cost of financial and workers to these activities are then traced. The secondary activities related to support and administrative activities are then traced to the primary activities. Finally the activities are grouped by service. Traditional costing methods frequently group indirect and support costs together after which they are allocated to products and services. This is done based on associated production figures. When economies of scale come in, the traditional approach tends to point too high a cost to voluminous products and services. It also attributes too low cost to less voluminous ones (Chan, 1993). Activity based costing on the other hand further logically associates indirect costs to the product or service that in reality uses these costs. This approach allows the clinic to utilize its resources in the best way possible to meet its goals. The approach provides ideas into the production process for bringing about services. It is a highly developed cost computation practice that allocates resource costs to products based on activity consumption (Lievens, Bogaert, & kesteloot, 2003). Two major tribulations tend to occur when traditional procedures are used to give information for management decision purposes. One of the problems is related to product cost aberrations. The other problem is related to the restrictedness of traditional product costing. The activity based costing is meant to overcome the two difficulties (Martin, 2008).Theoretical Framework Radiology developing very rapidly and it is evident that during the last twenty years new methods and procedures have been brought in and are on the increase. In western world, the number of people ageing is high and the requirement for health care services is increasing. This eventually increases the need for investment in healthcare. There is also an urgent requirement for methods to manage the resources that are available. Activity based costing method developed for radiology has been found to be notably more correct than the predictable methods. This method provides detailed data on cost for the different activities in the clinic. Activity based costing is a reasonably new sort of course of action that can be used as an inventory valuation method. The practice was developed to give more accuracy in product costs. The enhanced exactness is achieved by following costs to products through activities. In this approach, costs are traced back to activities and this is called activity costing. Costs are then traced in another stage to the products that utilize the actions. The idea can also be expressed as to state that activities use resources and products use activities. Fundamentally it is attempted to treat all costs as unpredictable by acknowledging that all costs vary with something,

 

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The primary difference between traditional approach and activity based costing is the way the indirect costs are delegated. Activity based system uses both production volume and non-production volume. The other difference is based on which costs are assigned to which products. In activity based costing an effort is made to include all costs to products. These costs include marketing, engineering, and administrative and distribution costs (Martin, 2008).Radiotherapy costs are principally ascertained by cost of personnel and equipment. Activities related to treatment procedures consume the furthermost proportion of the resource costs. In this, treatment delivery is mainly the vital component. This results to products that have an extended total treatment time being the most expensive. The model also instances the effects of changes in resource costs and practice conventions. The activity based costing is a practical instrument to estimate the actual cost structure in a radiotherapy clinic and to determine possible resource or changes in practice (Lievens, Bogaert, & kesteloot, 2003). A cost management accounting system of a radiology department should come up with information to meet costs allotment between costs of goods sold and cost of inventories for internal and external profit reporting. The system should also give crucial information to aid the managers in making better decisions. It should also give the selective information for preparation control and measurement of performance (Laurila, 2002). Laurila (2002) observes that in a typical manner classification of costs system includes direct costing system that is suitable for decision making where the costs of joint resources that change due to demand are not significant. Abject contribution items are then highlighted for unique studies. The shortcoming of direct costing system is the fact that the systems are misplaced in measuring and assigning indirect costs to specific cost objects. The other classifications are traditional absorption costing systems and now the activity based costing system. Both the systems assign indirect costs to cost objectives. The activity based system assigns overheads on a cause and impact basis and more precisely measures the comparatively high level of overhead resources used by the product. According to Laurila (2002), conventional cost accounting approaches have been unsuccessful in keeping pace with the product development and process technologies in radiology. This results in deformation of product costs and total cost information. Performance measures do not last and do not adequately show the variation in the clinic's economic standing. The result of technological varies the amount of costs directly associated to procedures. This results to gradual decrease, thus escalating the importance of precise handling of the expenses. Predictable costing overestimates the cost of high volume products and underestimates the costs low volume products. This eventually gives a false impression of the relationship between production and costs. Activity based costing aids in gaining insight into the real costs and solving the accounting problem. This approach has been used productively in manufacturing and servicing industry. Interest in use of activity based costing method in health care is escalating. This is because it provides more accurate product cost data than the conventional costing system. The budgets accuracy can be enhanced. The method aids in tracing the activities that do not improve the procedure. Removing those can enhance these processes. The fact that product costing is detailed makes assessment of the effectiveness more accurate (Ames & Hlavacek, 1990). Radiological dealings are services with a huge number of costs that are indirect. Without knowledge of the individual components of bureaucratic costs, it is hard for hospital administrators and radiologists to beat the challenge of cost containment sufficiently. The time needed to perform measures deviates widely. This variation depends on the

Condition of the patient, the staff and apparatus employed. Radiological operations usually need a lot of activities on top of the real imaging. Significant determining factor for final product and its excellence are time scheduling, patient registration, examinations analysis and conferences. Product progress and value guarantee are also required. In a typical university hospital, research and teaching of students entail imperative indirect costs. For proficient administration of the radiology department, the resource utilization data of all the important activities mentioned is indispensable (Arenson, Van Der Voorde & Stevens, 1998).Designing an ABC model characteristically follows the steps shown in Panel that will be analyzed in the following sections. The activity based costing can be utilized as a substitute to the traditional inventory assessment methods. It can also be used as a detach stand alone, that is a microcomputer based system that is configured only to obtain more precise information for management decisions. If activity based costing (ABC) replaces traditional system, or variable costing, it is then used as the company's inventory valuation method. Under this circumstance an activity based costs flow through the continuous inventory accounts. Nevertheless, if activity based costing is used as a separate management decision assistance system where activity based product cost are evaluated only once per year, then the activity based costing is not serving as the inventory valuation method for the company. Of importance is that whether activity based costing is utilized as a substitution for traditional inventory valuation or as a stand alone method, it offers information about how and why resources are used. However, according to activity based costing advocators, it is not exactly an inventory valuation method, or a separate product costing method. It is a resource utilization model that can offer a lot of information to help in decisions relating to product and process meliorations (Xiong & Jun, 2007).Analysis of the Problem Martin (2008) analyzes the chief tribulations that tend to occur when traditional methods are used to provide information for management decision uses. These problems can be overcome using the activity based costing in cost estimate in a radiotherapy clinic. First, in traditional costing, production volume related measures only are used to allocate costs of expenses to products. This is done although many products do not use indirect resources in proportion to the volume of production. Many kinds of indirect resource costs are brought about by products related to non-production volume individuality such as size and complication (Xiong & Jun, 2007). Traditional costing therefore distorts the product costs. As a result, too many costs are allocated to some products and on the other side too little overhead cost is apportioned to other products. The distortions are often called cross-subsidies. Activity based costing solves the difficulty by sorting out overhead costs into unlike cost category called cost pools. Those that come as a result of the same activity are put together and then allocated to products using a suitable measure of action volume (Martin, 2008). Another difficulty with traditional cost approach is that determining the product related administrative, marketing and distribution expenses of the product inventories is not an acceptable method acceptable for external reporting. On the other hand, engineering design, distribution and marketing costs are definitely part of the costs of a product given to a customer. Since these costs may fluctuate significantly from product to product, Activity based costing follows these costs to products and customers. This is done using supplementary cost pools and activity procedures. Consequently, Activity based costing gives the latent for more precise product costs for management conclusions. Activity based costing also renders potential payback to health care service delivery (Laurila, 2002).Conclusion & Recommendations This study evidences that the activity based costing methodology can be used productively in a radiotherapy clinic that initially uses a traditional accounting method. Costs should be accustomed in accordance to more precise unit cost selective information produced by activity based costing. The methodological analysis also shows concealed costs related to some activities with no added value. In addition activity based costing can evaluate the by and large subsidy needed by a non profit making firm. By use of adaptations with varying cost assumptions this approach can plan in advance grants required for community based services like health promotion (Arenson, Van Der Voorde & Stevens, 1998). Activity based systems has some uses in that it enables managers to evaluate the effectiveness and financial effects of quality advancement programs and in comparing them with their costs. The simplest method is to contrast the cost of unit differential between a health care service executed in accordance to quality standards and those done poorly. By use of some type of external substantiation of the quality such as well-known standards activity based system is able to track services either precisely or erroneously performed. It then can and find the equivalent unit costs (Xiong & Jun, 2007) Activity based costing investigation can be used before and after effectuation of a quality improvement program. The outcome will depict the cost of carrying out services, including and excluding the quality improvement costs. This provides a direct assessment of the costs and cost payback of the program. Another possible use of activity based costing in the health industry in many developing nations arriving at the prospective cost of increasing public and private health insurance coverage that depends on a revenue enhancement system. As many nations find it vital to struggle with ways of expanding the coverage while at the same time making health systems more competent. The capability of calculating and predicting such costs is indispensable (Laurila, 2002). Activity based costing is a technique designed for accuracy in costing a product or a service mainly based on a procedure description of the product. With Activity based costing it is possible to scrutinize the life of a process. Activity based costing is chief management tool in the radiology department. Work processes are delineated as activities with known unit costs. Cost organization can be aimed at activities where the cost benefit balance is not good. After a unit cost evaluation, measures are taken to transform the way in which an activity is done or the way in which resources are disseminated between activities. These managerial procedures may be of deliberate significance (Laurila, 2002).Activity based costing enables favoritism between patients of different nature depending on their needs. For instance comparing processes carried out in the ward with procedures done in the radiological department, the ones for radiological department were less expensive. Activity based costing is a method with greater accuracy for determining both professional and the managerial aspects of radiology (Arenson, Van Der Voorde & Stevens, 1998). Activity based costing (ABC) is a developed method of cost accounting that assigns indirect resource costs to the products. This technique uses much step allocation approach that is based on activity usage. Activity based costing was developed with the objective of capturing more precisely the economic consequences of product difficulty. This is evaluated in terms of type and quantity of utilized resources and of production volume. The methodology of Activity based costing is properly designed for cost calculation of health care products. In response to the need for reliable radiotherapy cost data, several radiotherapy departments have invested in the development of complicated systems. Some of these systems are based on the Activity based costing methodology (Soren, et al., 2005). The Leuven model showed that even in this age of very complicated and expensive radiotherapy equipment personnel costs still remain the most vital cost component of radiotherapy department. The models results indicated that personnel costs consume approximately twice the budget of equipment. The fact remains that the daily radiotherapy delivery is quite labor intensive and this makes it the most costly of all the radiotherapy actions. Consequently, the cost of the final product is chiefly determined by how long the treatment is and by the daily total treatment time. The extensive assumption that more complicated equipment will cut down personnel need and the connected cost was not established in the Leuven study. On the other hand, due to the lack of divisibility of these costly radiotherapy resources, it is important to aim for radiotherapy departments of sufficient size (Soren, et al., 2005). Advocators of Activity based costing say that it aids healthcare organizations more precisely understand their costs and aids evade suboptimal and often unfortunate decisions about prices, product mix, planning and control. The central idea behind activity based costing is that the production of a cost object generates activities which consume resources. More particularly, the assignment of overhead costs through activity based costing occurs in two stages. The activity based costing model depends on resource cost drivers to allocate costs to different activity cost pools. This means medical wage costs are assigned to varying activities such as supervision. Secondly, the additional allotment of costs is done in a second stage using activity cost drivers. These drivers measure the needs a cost object places on an activity (Demeere, et al, 2009).