- 5 Marks
Question
In their effort to build equitable, resilient, and sustainable systems for health, both The Global Fund and Gavi have approached you on the implementation of ABC systems to improve their customer profitability analysis.
Required:
Assess the applicability of Activity-Based Costing (ABC) in the services sector. In explaining your answer, identify four units in the healthcare sector where ABC systems are applicable and specify an appropriate cost driver for each.
Answer
Applicability of ABC in the Service Sector:
Activity-Based Costing (ABC) is widely applicable in the service sector for several reasons:
- Complexity of Service Processes – Many service organizations have multiple activities that contribute to the overall cost, making ABC more useful in identifying cost drivers.
- High Indirect Costs – Service firms have a significant proportion of overhead costs compared to manufacturing firms, making traditional costing methods less effective.
- Support for Cost Control – ABC helps in understanding which activities consume the most resources, enabling better decision-making for cost control.
- Enhanced Profitability Analysis – By accurately assigning costs, ABC enables service firms to assess the profitability of different services, customers, or departments.
- Improved Decision Making – Managers can use ABC data to optimize pricing, resource allocation, and process efficiency.
Units in Healthcare Sector and Appropriate Cost Drivers:
| Healthcare Unit | Appropriate Cost Driver |
|---|---|
| Laboratory Tests | Number of tests conducted |
| Radiology Department | Number of imaging scans performed |
| In-Patient Ward | Number of bed-days occupied |
| Out-Patient Unit | Consultation hours with doctors |
| Pharmacy Unit | Number of prescriptions dispensed |
- Tags: Activity-Based Costing, Cost Control, Cost Drivers, Healthcare, Service Sector
- Level: Level 2
- Topic: Activity-based costing
- Series: Nov 2024
- Uploader: Salamat Hamid