According to the text book the ABC came to forefront in the 1980s and 1990s; however, it was beginning to evolve as early as the 1960s when General Electric (GE) finance and accounting staff attempted to improve the usefulness of accounting information in controlling ever-increasing indirect costs (Easton, Halsey, McAnally, Hartgraves, Morse, 2013)
Please prepare a half page response for each part:
Part 1
According to the text book the ABC came to forefront in the 1980s and 1990s; however, it was beginning to evolve as early as the 1960s when General Electric (GE) finance and accounting staff attempted to improve the usefulness of accounting information in controlling ever-increasing indirect costs (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). There are two stages in the ABC product cost model. The first stage in the ABC product cost model includes the assignment of manufacturing overhead resources costs, such as indirect labor, depreciation, and utilities (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). The second stage of the ABC product cost model assigns those activity cost pools to products (Easton, Halsey, McAnally, Hartgraves, Morse, 2013).
Cost drivers are the most critical part of the ABC model; the activity cost driver is the characteristic for measuring the quality of the activity for a particular period of time (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). Before implementing the ABC model the management process must be evaluated, organized and adjusted to avoid any setback during the implementation (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). As part of the organization evaluation planning is the most important and critical. Planning bring to every manager a complete scenario where the company is and where is going to be after the implementation. The evaluation stage it could also use to develop a specific design for the specific product or process. Promptly after the design process the design has to be validated to identify any failure associated with the new system to be implements
The organization top management and lower-level should be involved to lead the implementation of the ABC model; employees may also be involved into the have support from their filed expertise and avoid confusion or misunderstanding about the implantation process. But ABC model is not new for cost assuming and cost objectives and the traditional costing method is indirectly applicable to costs to product based on a predetermined overhead rate (Easton, Halsey, McAnally, Hartgraves, Morse, 2013).
Part 2
The activity based costing has evolved over the last century as technology advancements made significant changes in the cost structure of production. As the proportion of the raw materials and labor into the overall costs of manufacturing goods has decreased the costs related to the equipment used to produce these goods have increased, the need for appropriate allocation of these costs became significant. According to Easton, Halsey, McAnally, Hartgraves and Morse (2013), the activity-based costing (ABC) is a system that identifies cost of key activities and traces these costs to products based on the quantity of activity consumed by these activities.
I performed some research over the internet for an activity based costing and I wanted to bring one that is closer to the healthcare industry. An article authored by Pat Shuneman, provides an overview of the activity based costing in the managed care reimbursement structures. He argues that it is absolutely important for medical practice to apply this method in order to remain profitable, eliminate unnecessary costs and manage effectively their managed care contracts. In order to start the implementation of the ABC method, the practice should use the accrual basis, define its cost centers and allocation centers and determine procedure costs. The author elaborates that most practices currently use cash basis method; however for the ABC method uses as a foundation the accrual basis, as it is important to track all the costs assigned to various procedures timely and match them with the respective revenue flows.
Cost centers represent various units of a medical practice – surgery, lab, radiology, administration, etc. Direct revenues and expenses will be allocated to the practitioner who renders the service; the variable overhead costs will be allocated to each practitioner based on the ratio of revenues earned by him to total revenues earned during the period. Fixed overhead could be allocated equally. Other ratio of allocation of variable costs could be considered by each practice. The degree of the detailed allocation should also depend on the cost of maintaining the cost accounting system.
For an initial step direct patient expenses that should be accounted for will include making appointments, refiling, billing, verification of insurance, etc. Indirect expenses like rent and utilities can be allocated based on square footage occupied. Office equipment and supplies could be allocated equally among patient centers. The employee-related expense could be allocated based on the time spent on a procedures; the rest could be allocated to a general cost code.
Once the costs have been identified and allocated to appropriate cost centers, these could be allocated to a specific procedure based on a relative weight of each cost center assigned to this procedure. Determining the accurate cost of the procedure will help practitioners to negotiate their contacts appropriately, and use their resources more efficiently.
