ACTIVITY BASED ACCOUNTING

Activity based Accounting



Case: Activity based Accounting in Northfields Hospital

Case

Northfields Hospital is a private hospital, whose management is considering the adoption of an activity-based costing (ABC) system for the year 2012/2013. The main reason for its introduction would be to provide more accurate information for pricing purposes. With the adoption of new medical technology, the amount of time that some patients stay in hospital has decreased considerably and the management feels that the current pricing strategy may no longer reflect the different costs incurred.

Prices are currently calculated by determining the direct costs for the particular type of operation and adding a mark-up of 135%. With the proposed ABC system, the management expects to use a mark-up for pricing of 15% on cost. This percentage will be based on all costs except facility sustaining costs. It has been decided that the hospital support activities should be grouped into three categories - admissions / records keeping, caring for patients and facility sustaining.

The hospital has four operating theatres that are used for nine hours a day for 300 days a year. It is expected that 7,200 operations will be performed during the coming year. The hospital has 15 consultant surgeons engaged in operating theatre work and consultancy. It is estimated that each consultant surgeon will work at the hospital for 2,000 hours in 2012/2013.

The expected costs for 2012/2013

£'000

Nursing services and administration

19,872

Linen and laundry

1,840

Kitchen and food costs (three meals a day)

4,512

Consultant surgeons' fees

10,500

Insurance of buildings and general equipment

120

Depreciation of buildings and general equipment

1,040

Operating theatre

8,100

Pre-operation costs

2,520

Medical supplies - used in the hospital wards

2,200

Pathology laboratory (where blood tests etc are carried out)

1,840

Updating patients records

1,180

Patient/bed scheduling

200

Invoicing and collections

320

Housekeeping activities, including ward maintenance,

window cleaning etc

1,520

Other information for 2012/2013

Nursing hours

480,000

Number of pathology laboratory tests

8,000

Patient days

44,000

Number of patients

9,600

Information relating to specific operations for 2012/2013

ENT

(Ear, nose and throat)

Cataract

Time of stay in hospital

4 days

1 day

Operation time

2 hours

0.5 hour

Consultant surgeon's time (which includes

time in the operating theatre

3 hours

0.85 hour

Direct Costs

Number of Theatre hours

300 days x 4 theatres x 9 hours

10800

Thither Cost per hour

£ 8,100 / 10,800

£ 750

Pre-operation cost per operation

£ 2520 / 7200

£ 350

Consultants fee per hour

10,500 / (2000 hrs x 15)

£ 350

Indirect Costs

Caring for patients

Nursing

£ 19,872

Linen and Laundry

£ 1,840

Kitchen and Food

£ 4,512

Medical Supplies

£ 2200

Pathology Laboratory

£ 1840

£ 30,264

Patient Care Cost Per Day

£ 30264 / 44,000 days

£ 687.8182

Admissions and Record Keeping

Updating Records

£ 1180

Patient / Bed Scheduling

£ 200

Invoicing

£ 260

£ 1640

Admissions Cost per Patient

£ 2340 / 9600 patients

£ 170.8333

Facility Sustaining Costs

Housekeeping

£ 1520

Insurance of Buildings

£ 120

Depreciation of Buildings

£ 1040

£ 2680

Solution

Ear Nose and Throat

Price for an ENT Operation

Existing Method

ABC

Direct Costs:

Operation

£ 750 x 2 hours

1£ 560

Pre-operation Costs

£ 350

Consultant Fees

£ 350 x 3 hours

£ 1050

£ 2960

£ 2960

Mark Up (135%)

£ 3996

ABC (Support Costs)

Patient Care Cost

£ 687.8 x 4 days

£ 2751.2

Admission Costs

£ 170.83

£ 2922.1

5882.1

Mark-up (15%)

882.31

£ 6956

£ 6764.4

Before going ahead with the calculation, we need to identify the cost drivers at two different stages. There are two kinds of cost drivers, first are those which can trace the cost of inputs into cost pools and second are those which can trace the cost ...