The Guidance Manual of the NHS, quoted in Real world case 5.1, contains a great deal of detail on how to calculate full absorption costs of activities. This section explains the calculation of the cost of each outpatient’s attendance at a clinic providing mental health services, where non-attendance is a problem 156 Due to the particular nature of mental health services, ‘DNAs’ (‘Did Not Attends’)

utilise considerable mental health resources but, up until now, this activity has not formed part of the reference costs collection. In a change to reporting requirements, outpatient activity for mental health services will require ‘DNA’ activity to be identified and reported separately as a memorandum item. There is no requirement to submit unit cost data for ‘DNAs’. This means that:

l The total cost of a specific outpatient service, calculated using total absorption costing methodology, should be identified for each category of collection, for each of first and follow up outpatient attendances in mental health.

l Activity for the total number of face to face attendances for each of first and follow up attendances should be identified.

l Unit cost for each type of attendance should be calculated by dividing total cost by the total number of face to face attendances for each of first and follow up attendances.

l In addition, total number of ‘DNAs’ for each of first and follow up attendances should be reported as a memorandum item. This activity must not be included in the total face to face activity reported, nor in the calculation of the unit cost of face to face attendance, as to do so would inappropriately dilute the reported costs.

Discussion points 

1 What are the benefits of recommending full absorption costing?
2 What are the benefits and limitations of dividing total cost by number of face to face attendances?

Real World case 5.1

The Department of Health publishes guidance to those recording the costs of health service activities. This is an extract from the Guidance manual.

Costing The principles for costing in the NHS are set out in chapter 2 of the NHS Costing Manual.

The fundamental principle is that reference costs should be produced using full absorption costing. This means that each reported unit cost will include the direct, indirect and overhead costs associated with providing that treatment/care.

The costing guidance states that as far as possible costs should be directly allocated to specialty level. Where this is not possible, appropriate apportionment methodology should be used. The costing manual provides guidance on appropriate apportionment methodology and the treatment of indirect and overhead costs. Given maintained audit involvement for 2005, it is vital that decisions and processes undertaken in apportioning costs are defensible.

Discussion points 

1 What problems might be faced in apportioning overhead costs?
2 Why might it be important that decisions and processes used in apportionment are defensible?