|
|
|
|
|
abc costing
|
|
|
INTRODUCTION The last 10 years have brought substantial changes to the health care industry. Managed care fee reimbursement structures have many physicians working harder, but earning less. Costs for providing medical services have increased, while payments for those services have decreased. Capitation has shifted insurance risk to the medical practice, and many physicians and administrators do not know how to adequately evaluate the performance of their managed care contracts. To remain profitable in this environment, a physician needs accurate cost information from which informed business decisions can be made. The health care industry can use techniques developed by manufacturing companies to help them remain profitable, eliminate unnecessary costs and plan for change. The growing demand for high-quality, low-cost products led manufacturers to develop a methodology called activity-based costing, or "ABC." This technique identifies the relationship between an activity and the resources needed to complete it. It then assigns costs to the resources consumed by the activity. This technique can be effectively applied to a medical practice. When a practice knows how much it costs to provide a specific service, informed managed care decisions can be made. Actuarial data can be used to predict procedure utilization, and through these data, the number of procedures the practice will perform under the contract can be estimated. Cost figures can be applied to these estimates for a projection of how much it will cost the medical practice. The amount the practice will receive can be compared with what the practice anticipates it will cost to provide services . The difference will be profit or loss. Any profitability estimate is a guess, but accurate cost information can make that guess an educated one. Activity Based Costing (ABC) is an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the organization. Activities can be defined as a named process, function, or task that occurs over time and has recognized results. Activities use up assigned resources to produce products and services. Inputs are transformed into outputs under the perimeters set by controls performed by the organization's employees and their tools. Activities can be perceived as consumers of resources in production of materials, services, events, or information. Activities are the common denominator between business process improvement and information improvement. Documenting and understanding activities is necessary in order to improve the business process, since activities are the building blocks of business processes. When employees understand the activities they perform, they can better understand costs based on the activities. Traditional financial information is reorganized by ABC into a form that makes sense to the casual functional user; in addition to the usual information that tells them how they spend money, it also tells them what to do with the money. This ability to place costs on activities and their outputs provides a clear metric for improvement, whether for determining improvement priorities in the long-term or for measuring near-term success. ABC allows functional users to characterizethe value of, or need for, each activity, getting rid of the waste before automating (or reautomating) activities. Activity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods. The traditional cost accounting methods were designed around 1870 - 1920 and in those days industry was labor intensive, there was no automation, the product variety was small and the overhead costs in companies were generally very low compared to today. However, from the 1960s – particularly 1980s - this changed rapidly. For these reasons, and more, traditional cost accounting has been called everything from 'number 1 enemy of production' and questions whether it is 'an asset or a liability' have been raised. The question of course is whether ABC has overcome these deficiencies or not? It has. In fact, ABC has been called one of the most important management innovations the last hundred years. So what is really the difference between ABC and traditional cost accounting methods? Despite the enormous difference in performance, there is only three major differences: * In traditional cost accounting it is assumed that cost objects consume resources whereas in ABC it is assumed that cost objects consume activities. * Traditional cost accounting mostly utilizes volume related allocation bases while ABC uses drivers at various levels. * Traditional cost accounting is structure-oriented whereas ABC is process-oriented. This is discussed in more detail in the subsequent sections and illustrated below. But first, the directions of the arrows are different because ABC brings detailed information from the processes up to assess costs and manage capacity on many levels whereas traditional cost accounting methods simply allocate costs, or capacity to be correct, down onto the cost objects without considering any 'cause and effect' relations.
|
|
|
|
Still Can't Find What Your Looking For? Then Try a Essay Search!
|
