Healthcare Industry Activity-Based Costing in Case Study

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Therefore, although executive salaries and other similar costs are difficult to assign, a method must be developed for doing so, if the accounting is to be the most effective. One method might be to divide the executive salaries by the average number of patients seen in the facility over the year, or some similar method. This is only one example of how an indirect expense can become a direct expense using ABC methodology.

The purpose of ABC is to serve as a tool for management. If management can see how each unit affects the cost structure, then they can spot areas that are more or less efficient. There are more limitations in managerial abilities to do this in the healthcare industry than in other areas of the economy. This is largely due to the limits imposed by maintaining patient safety. However, cost accounting can still provide an effective means to reduce costs to the maximum extent possible.

Reducing costs in the healthcare industry means achieving greater cost efficiency. ABC spreads the burden over a greater number of patients and allows every expenditure to be accounted for in some manner. As this case study demonstrated, reducing costs does not have to mean sacrificing patient safety. One does not have to reduce costs by buying cheaper supplies. Direct costs can remain the same. However, costs can be reduced by reducing the amount of administrative time needed for each procedure.

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Spreading out administrative costs provides a more realistic picture of how these costs affect the costs of each individual procedure. Administrative costs that are out of line can be reduced in order to control costs. This is how ABC can be used more effectively to reduce costs and achieve higher profits in the healthcare industry without sacrificing patient safety.

This case study indicates that in the healthcare industry, ABC can play an important role in the ability to reduce healthcare costs. Although, there is little that can be done to reduce direct costs associated with a procedure without sacrificing patient safety, ABC provides insight into how to reduce indirect costs associated with a procedure. The attention of the healthcare industry should remain focused on using ABC to recognize inefficiencies associated with indirect costs per unit. Reductions in indirect costs will be reflected in reductions in the overall costs of a procedure. This will allow the facility to channel more funds into providing the best possible care for their patients. This will reflect in their reputation, thus giving them a competitive advantage (Grandlich, 2004). This results in improvements that impact factors other than the bottom line in the healthcare industry......

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