For example, an x-ray process can be broken down into four primary cost drivers, administrative check-in, patient exposure, patient return, and film processing, which can be accounted for and billed based on usage for each separate process.
ABC Costing at Westmount
Given a reasonable amount of gross margin that should be expected in the industry (GMB, 2006) the gross margin should of provide a return of over 490,000 worth of profit on the financial statement. Therefore either there must be more revenue or better controls on costs; most likely a combination of the two. The calculation is as follows:
The current costing arrangement at Westmount depended completely on the square footage of the residents unit. Thus it is reasonable to anticipate that all stakeholders would benefit from the application of the activity-based costing system; except of course those residents who required the most services. The costs were identified to fall into six categories:
1. Food Services
2. Support Services
3. Laundry
4. Recreation
5. Facility
6. Housekeeping
Previously, each of these costs was allocated overhead by a simple calculation that divided fixed costs associated by the number of residents (with multipliers for the rooms larger than the studio). Furthermore the administration and executive salaries were allocated to each cost department equally.
One cost driver that can be identified from the case is dietician consults. The case notes that while some use dietician services, such as the clients with diabetes, others rarely or never use dietician services. Therefore if the consult from a dietician was made a cost driver then this would more accurately account for the costs for that service. For example, if a resident used ten separate consults in a month then this would be able to be billed for twice as much as a client that only required five consults to manage their diabetes.
Another cost driver should...
In the case of laundry the cost driver could be applied per load of clothing. Each load would have a cost that includes an amount of the related overhead included in it. Therefore, clients who requires more frequently or larger amounts of laundry would be billed fairly for their contribution to the overhead. In the case of housekeeping, it is probably sufficient to make the cost driver represent one trip to clean. For example, some residents might require one housekeeping service per week while others may use two or three. It is reasonable to believe that breaking this down any further might overcomplicate the cost driver. For example, say if housecleaning trip took six hours and another only took one then this might not be the most accurate way to allocate costs. However, the bulk of housekeeping trips should fall within a fairly reasonable range of time spent.
Summary
Westmount could increase profitability by instituting an activity-based costing method. First, profitability could be achieved by more accurately matching costs with activities; which have been identified as successful in the healthcare industry. The customers who require specialty or increased frequency of service would be required to pay for services in the amounts equivalent to their usages. Furthermore, this would also provide an incentive for residents not overuse any services unless necessary; thus potentially reducing the amount of staffing requirements.
Works Cited
Canby, J. (1995, February). Applying activity-based costing to healthcare settings. Retrieved February 14, 2011, from CBS Business Network: http://findarticles.com/p/articles/mi_m3257/is_n2_v49/ai_16565845/
Katz, D. (2002, December 31). Activity-Based Costing. Retrieved February 18, 2011, from CFO Magazine: http://www.cfo.com/article.cfm/3007694
Turney, P. (2008). Activity-Based Costing. Retrieved February 18, 2011, from SAS: http://www.sas.com/resources/whitepaper/wp_5073.pdf
