Cost assignment is a major problem for healthcare providers as, typically, healthcare providers experience a high level of indirect and support costs – blood tests, diagnostics and out-patient care, for example.Such costs are not easily allocated to patients or procedures using traditional costing methods. Healthcare providers typically utilize three costing approaches – top-down, bottom-up and standard costing. A bottom-up costing involves tracking actual costs at the procedure level as the procedure is undertaken (Travis, 1987). Activity-based costing (ABC) is one such approach. ABC allocates indirect and support centre costs to products or services based on consumption of resources. Consider the example of blood tests. If a procedure utilized three blood tests, this requires three uses of resources of the pathology department and associated cost. If another procedure required only one blood test, this would imply a lower cost. In other words, the cost driver is the number of blood tests. If a traditional absorption costing system was used, the blood test costs might be allocated using operating-theatre hours, meaning ABC would allocate more realistic costs to the procedure using the greater resources of the pathology department.

Capturing and reporting on costs in large healthcare organizations is not easy. Typically, an ERP is needed to capture and report on costs. SAP Business Objects provides business intelligence solutions. These systems help businesses to capture and report on complex data. SAP Business Objects provides a custom solution for the healthcare sector, which has been adopted by Portsmouth Hospital NHS Trust in the UK, for example. A customer testimonial by the Trust reports on how the system improved ‘clinical operational visibility and decision-making’. Similarly, the AmeriHealth companies report improved cost and profit information across all services and customers using SAP Business Objects.

Questions 

1 Can you identify another service sector business which might find ABC useful?

2 Do you think many businesses utilize ABC techniques? Why or why not?