Please complete both discussion questions.

1. Activity-based costing (ABC) is a popular control approach to budgeting.

Video
Here is a video to review the foundations of the approach: Summary_clip_on_ABC (Run
time: 3:00)
What are the benefits of ABC for healthcare? What are the drawbacks of ABC for
healthcare?

2. Access the article by Federowicz et al (2010) on Activity-based costing from the One
Stop Course Reading section of the Course Readings, found under the Course Materials
menu in D2L. Create an example of a change that might be put into place in your
workplace, the site you selected for your Health Service Profile Assignment, or another
health care example. Post your step-by-step approach in the discussion box.

1. ABC is defined as activity-based costing – accounting method utilized to allocate overhead

and indirect expenses to linked goods and services (Longest & Darr, 2014). In contrast to
conventional costing techniques, this accounting method of costing acknowledges the connection
between costs, overhead activities, and manufactured goods, allocating indirect costs to products
less randomly (Sayles & Gordon, 2020).

Let’s look at some strengths and weaknesses of this costing method

a) Strengths
- The ABC approach offers a better awareness of overhead expenses with in-depth knowledge of
cost drivers, which is crucial for both day-to-day and capital decision-making as it helps to
pinpoint problems and potential areas for improvement more precisely (Niñerola et al., 2021).
-The ABC approach enables accurate activity tracking to describe cost behaviors. With
application of capacity and utilization metrics, it assists in strategic cost management (Longest &
Darr, 2014).
-The ABC method delivers comprehensive data that may be applied to balanced scorecards,
improved performance management, as well as benchmarking inside the facility, and for peer
comparison (Sayles & Gordon, 2020).

b) Weaknesses

- ABC method is quite expensive to implement and maintain. Constant requirements for
additional data collected for analysis, and increased length of process it entails makes more
costly than other costing methods (Jalalabadi et al., 2018) This drawback can be crucial within
the scope of public healthcare system.
- The ABC technique is unique to the organization due to its breadth. It enables for detailed cost
analysis within the facility but cannot be shared with third parties (Sayles & Gordon, 2020).

- Connecting to previous point, the ABC approach take significant takes significant amount of
time of complete as it is involves greater detail and more extensive analysis. Time is the most
expensive measure when it comes to delivering the health services (Sayles & Gordon, 2020).

2. Example of new payroll system implementation using ABC estimation within the scope of
healthcare sector (based on article by Federowicz et al., (2010) and article by Kaplan &
Anderson (2004).

Step 1: identification of all activities that will take on allocation of total costs of operation

List of processes surrounding the function of hospital payroll department should be identified.
Key instances would be initiation and maintenance of employee payroll accounts, payroll
assessment and fulfillment, maintenance of negotiated wage-related conditions for unionized and
non-unionized employees, vacation control and maintenance, as well as other workforce related
financial incentive programs (Federowicz et al., 2010).

Step 2: designation of expenditure for each of the activities defined in step 1.

Cost for each of pre-defined activities should be identified including direct and indirect spending
such as salary for the department workers, capital software implementation cost, technical
support, potential hardware upgrade, etc. Healthcare facilities as a modality of public healthcare
system have very sacred resourced that should be utilized very carefully especially outside of
clinical areas. Thus, fair but reasonable fund designation may be quite challenging for project
like this (Federowicz et al., 2010).

Step 3: measurement of total cost over the period assessed to identify the cost drivers or
efficiencies.

Total cost of all defined activities should be assessed to insure it is kept within allocated budget.
In early stages cost drivers and efficiencies should be identified to ensure that drivers are address
promptly and will not result in incurred spending while extra funds found in efficiencies are
properly reallocated to areas of need (Kaplan & Anderson, 2004), (Federowicz et al., 2010).

Step 4: determination of total users fully engaged in activities both from maintenance and
utilization perspective.

Implementation of defined activities require engagement with users to insure complete utilization
of potential of cost allocated (Federowicz et al., 2010).

Step 5: determination of total cost per client of defined activities.

In order to assess if the defined activities drive improvement and efficiencies including from
financial perspective the cost per client of activity should identified (Federowicz et al., 2010).

Step 6: measurement of efficiency from implementation of defined activities to draw conclusion

for further planning.
Lastly, the efficiency from implementation of defined activities should be continuously
monitored to ensure the initial intention is working while area of improvement are constantly
addressed. This will ensure planned cost impact is achieved and while strategic goals are
outreached (Kaplan & Anderson, 2004).

Activity-based costing (ABC) is the method for effective measurement and evaluation a
healthcare organization's clinical and administrative expenses as well as comprehension who is
using resources, where inside the organisation, and for what reason (Kaplan & Anderson, 2004).

Course Module 6. (n.d) In C. Valentino (Ed.). (2023), CHSM 305: The Management Cycle. The

G. Raymond Chang School of Continuing Education at Toronto Metropolitan University

Federowicz, M. H., Grossman, M. N., Hayes, B. J., & Riggs, J. (2010). A tutorial on activity-

based costing of Electronic Health Records. Quality Management in Health Care, 19(1),

86–89. https://doi.org/10.1097/qmh.0b013e3181ccbd71

Jalalabadi, F., Milewicz, A., Shah, S., Hollier, L., & Reece, E. (2018). Activity-based costing.

Seminars in Plastic Surgery, 32(04), 182–186. https://doi.org/10.1055/s-0038-1672208

Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business
Review. https://hbr.org/2004/11/time-driven-activity-based-costing

Longest, B. B., & Darr, K. (2014). Managing Health Services Organizations and Systems (6th

ed.). Health Professions Press Inc.

Niñerola, A., Hernández‐Lara, A., & Sánchez‐Rebull, M. (2021). Improving healthcare

performance through activity‐based costing and time‐driven activity‐based costing. The

International Journal of Health Planning and Management, 36(6), 2079–2093.

https://doi.org/10.1002/hpm.3304
Sayles, N.B. & Gordon, L.L. (Ed.). (2020). Health information management technology: An

applied approach, (6th ed.). Chicago, IL: American Health Information Management

Association

(CHMS 305, n.d.)

(Longest & Darr, 2014).
(Sayles & Gordon, 2020).
(Federowicz et al., 2010).
(Niñerola et al., 2021).
(Kaplan & Anderson, 2004)