Activity-Based Cost Systems - Book Report/Review Example

Task “Activity –Based Cost Systems” 5 Unbundling the cost of Hospitalization by Lawrence p. Carr The article explains that, the health insurance schemes are critical in unbundling the cost of hospitalization. The most common approach used by the insurance companies involves the examination of the billing practices of various health care givers. This helps to estimate the cost of the hospital nursing care and the attributed services. In most cases, particularly the conventional way, the cost of nursing is included in the charge of the hospital accommodation. Some of the overhead costs attributed to the nursing expenditure. An example of the labor cost attributed to the nursing expenditure can be aggregated in the daily bill of the patient. The challenge with the conventional way of billing is that patients use the nursing services in different disparities. This brings an extra cost for those who use fewer amounts of these services. On a similar note, the fixed charges are not always attributed to the nursing services offered. The other disadvantage of the conventional type of billing involves the availability of the nursing services, which are availed on call. The disadvantage attributed to the on call services is the lack of quantification of the value offered. This implies that, the emergency services some times may be of low standards and this leaves the patient on the losing end in terms of cost. On the other hand, the activity based costing systems is advantageous since it saves the patient the challenges faced when the conventional method of costing is used. This system measures the costs per a fixed period for example per hour. This will enhance an insurance scheme, which charges per hour depending on the educational level and skills of the nursing service providers. This may include the registered nurses, licenced practical nurses and ancillary nursing assistants. In addition, the system looks forward to integrate its mechanism of operation in terms of paying for the patients to a reimbursement system. An example of the Braintree hospital where the vice president feels that detailed information about the nursing services attributed to the patient care need to be understood in another level, particularly the insurance givers who seem not understand the mix of services offered by a diverse group of professional with dissimilar level of skills. This aspect is the one that leads to the nursing service cost. On a similar note, the pilot study done at the Braintree hospital by Mary Jean, the vice president, indicated that, absence of hard data made it difficult to calculate on the cost of the nursing service. However, after, the implementation of the system and active participation of the staff initialized, capturing of both the variable and unpredictable data trends. The database created is critical in evaluation and computing the cost of the nursing services offered to patients. Therefore, use of ABC in this case, becomes easy and more efficient comparing to the conventional approach, in terms of data integration and nursing service cost estimation. 5.3 Activity Based Costing for Marketing by Ronald J. Lewis The article reveals that, various companies and nations are facing serious economic problems because of continued application of the manufacturing and conventional cost accounting systems in the marketing sector. The US serves as an example that has ignored the ABC for marketing. The ABC for marketing can be merged to involve distribution channels and this will reduce the cost attributed to the physical distribution, which make up to 50% of the total cost of production. With the large since of the US, the cost of physical distribution form a primary cost factor in the production of goods in the US. However, this is not the case in nations such as Japan, and Britain due to their small size. The ABC principles are used in determining the functionality of the ABC marketing approach in term so the direct costs attributed to the product lines. The ABC tracing path involves 1. Determining the operations undertaken, during marketing process, they include advertising, selling and shipping among others. 2. Totaling both direct and indirect costs attributed to the various activities 3. Establishing the cost drivers of each operation 4. Computing the unit cost for each operation 5. Then apply an analysis technique such as the contribution cost approach The above ABC marketing tracing path is a sure approach to reduce the cost attributed to the physical distribution approach. 6.1 Distribution Channel Profitability: ABC concepts can help companies make strategic decisions, by Kenneth H. Manning The aspect of distribution profitability makes meaning to all suppliers, producers, manufacturers, wholesalers and even retailers. This is a core area of production and selling industries. This determines the amount of sales that can be done and the attributed profits. In addition, the distribution potential tells more about the company’s potential to reach and satisfy its market niche. The ABC approach is more advantageous over other methods such as the conventional costing method, because it is accurate in determining the costs of products. This is so because; the overhead costs are allotted to direct paths in a straight way, which eases the computation process. However, the disadvantage attributed to this method is the amount of time and expertise required in the analysis process. This disadvantage is linked to the application of the product driven cost assumption. The ABC method is critical for the focused competitor entering the market because of the in depth analysis offered when using the method, and this leads to sound decision-making. In addition, the methods are fundamental in restricting the sales team. All the information is analyzed and decisions made according to the results. These results are based on the evaluation of the cost and gain differential amid the clientele and the distribution channels of the company. 6.4 Measuring and Managing Customer Profitability The article reveals that, most companies have shifted attention to the customer’s satisfaction. Various methods such as Enterprise resource planning and Customer relationship management systems are usedto establish the feelings of the clients about products in the market. In essence, the companies are using these methods to establish the changing trends of the market and use the data to change their brands in order to meet the expectations of the customers. The ABC can be used in this process by applying its conceptual framework, which connects the clients’ transactional data from ERP to CRM systems. The ABC frameworks attribute this connection with the financial information, which helps the company to carry out evaluation of the clients in terms of the financial standing. This helps in understanding the spending trends of the customers in relation with the products bought and this enhances knowledge concerning brand trending. 7.4 The element of Supply Chain Management The article covers the role of supply chain management (SCM) in companies in maintain and increasing their market competitive advantage. Therefore, the SCM components are planning and controlling the material flow from the consumers and the philosophy adopted by the companies to unify resources and skills of a business function. On the other hand, Supply-chain is integrated in a business value chain to carry out initiates such as Just-in-time (JIT), manufacturing, outsourcing, total quality management and target costing. In general, a business value chain includes six basic activities such as profit margin, services, sales and marketing, outbound logistics and operations. Lastly, it includes the purchased supplies and inbound logistics. A successful SCM practices form alliances with suppliers in building trust and mutual benefits that improves the outcome of a business operation. In improving the relationship, four strategies that include power-balancing, codependency, target costing and personal ties must be adhered to increase the alliances and establishing a lower bid in the target cost. For example, equal dependence is achieved when there is a balance between the suppliers total output and the total customers purchase. Target costing indicates the actual process used to design goods as is the perceived value of the products produced. It is worth noting that, higher quality products supplied in small and frequent quantities are more costly due to increased costs. In addition, inadequate capacity, labor and infrastructure reduce the level of service quality hindering the alliance of suppliers and the consumers. In logistic-based supply chain, the economic costs of lost are higher when there are limited constrains than when there is an extreme constrains. Thus, the LSCM activities in a successful business include sourcing and purchasing, conversions and production scheduling. In addition, it includes the linkage between the customers’ services, products sales, market activities and promotion. Therefore, the economic order quantity (EOQ) and the materials requirement planning formula are used to optimize the production schedules and values. On a broad front, it implies that the characteristics of the LSCM systems are designed to have an accurate and rapid transaction processing that integrate real time activities with the advanced decision-support abilities. Thus, at any level of computing target costs must not exceed acceptable margins of products at a given price point. 8.1 Control Tomorrow’s Costs through Today’s Design By Robin Cooper and W. Bruce Chew The article analyses the target costing drives in product development strategies, the roles of quality products and the costs disciplines. Through the analysis, the articles describe the logistics, strategic assumptions, the costs gaps and the target-costing process that are used by the Olympus Company. Cost discipline benefits 1) Assist senior managers in cutting down staffs, outsourcing, eliminating frills and reengineering downstream process. 2) Assists companies in undertaking difficult task risks or avoidance of the difficult risks. 3) Assists Companies to regain their lost share after experiencing poor quality product production 4) Assists Companies to gain and hold market leadership through development of a better control mechanism. Mechanisms of closing the target control gaps 1) Product life-cycle analysis through cost research and product cost regulation. 2) Increasing the product quality e.g. by eliminating labor-intensive undesirable adjustments. 3) Using falling production costs in raising margins and dropping price points. 4) Bring the cost of suppliers down. Mechanisms of smoothing out the target-costing process 1) Projecting dollar margins and listing dollar targets 2) Defining the products needed by the customers 3) Identifying the existing gap between the initial projected cost and the target costs 4) Ascertaining economic requirements for profitability The target costing process The target-costing process begins by market mapping as the first step of the process. Product definition and position step follows exploring market place characteristics. This step, converge at product prices (timing and volume) and the product quality and functionality targets. Within the same market structure, the union of this factors combines with the corporate financial requirements and the market production economic costs to form expected costs of the products. Finally, the overall target costs are computed by obeying the cardinal rule of combining all the costs. 8.2 The Use of Targeting Costing in Developing the Mercedes-Benz M-Class Target costing techniques are used as management tools for regulating the costs of products at early stages of goods development. Thus, the target costing systems have three major characteristics that include: 1) Targets for quality, prices and functions set in advance 2) Major costs identified in designing phase 3) Multifunctional approach These characteristics are integrated in the target costing principles to interrelate various managing components such as price-lead costing, Customers orientation, cross-functional team, value chain involvement and the lifecycle cost reduction. In the price-led costing, the function of costs, profit margin and markup are added to the estimated product cost set in the initial market price. However, if the consumers/ customers reject the prices of the products determined by this principle, the producers have no power to change the value of the goods but they can attempt to reduce the profit margin or trimming the production costs. Hence, the target costing principles consider selling prices and profit margin as uncontrollable variable as they are determined by the market structures. For customer orientation practices, the price, quality and the functionality of the products are the essential elements considered by customers in choosing a desired price. Thus, a company competitive advantage is gained if the company is able to maintain their products with acceptable price that considers a greater product functionality as well as higher products quality. Life cycle cost reduction, the target costing of the products are customers oriented and seek to reduce the manufacturing or operational costs during the designing of the products. Whereas, the company’s value chain involvement stress on managing costs throughout the value chain of products productions. Thus, redesigning cost at this level is slow because it is systematic and advantageous either to the producers or the customers in controlling the market price. Index development support target costing by ensuring the costs and benefits are directed towards resources that function efficiently. For example, the value cost engineering of the products provides a competitive benchmark conducting products purchases, disassembling and the competitors’ behavior. On the same approach, the target costing values assist a streamlined management structure that facilitates a rapidly developed and efficient project performance. 9.1 The Control Function of Management The article analyses management control functions in a basic control process. On a broader front, the article analyses the general control problems that faces organization management systems. On the same approach, the article describes realistic achievement of organizations in implementing the cost of control. The article further identifies various types of control systems describing their advantages and disadvantages. The last section of the article addresses the appropriate choice of cost control that are in initiated at different management setting. The article begins by addressing the benefits and roles of the control systems in a business organization. Thus, the set of control are implemented at an organization’s best interests with aims of guarding the organization against undesired action behavior by encouraging good behavior. 1) Control systems solves personal limitations problems by improving how best they can perform through training and providing them with good working information. Control system solves innate perceptional and cognitive bias the cause personal limitation in taking correct business decisions. 2) Control function of management assist employees in achieving their own goals as well as the organizational goals through equipping them with the right guidance where incongruent goals exist. 3) Protect organization from experiencing performance failure where there are possible undesired behavior, employees’ motivational problems and personal limitations. Characteristics of a good control system 1) Future-oriented with no unpleasant surprises in its guidance 2) Multidimensional with multiple objectives in its performance including its quality, asset management and efficiency 3) Adequate in assessment and judgment on the performance assurance 4) Economically desirable that optimize benefits and profits Mechanisms of achieving a good control system 1) Control problem avoidance through centralization of the problems, risk sharing and control problem elimination 2) Control specific actions by defining the limits of acceptable behavior, tracking behavior as well as punishing or rewarding deviations from a defined limit. 3) Control of results by the same mechanism of increasing action accountability 4) Control of personnel by upgrading the personnel capabilities and improving individual communication Feasibility constraints choice control The feasible option defines the amount of control and the total needs of control. Therefore, the needs for controls, the amount of control provided, the outlay cost, and behavior assists organizations or individuals in making the right feasible choice. Thus, the feedback of the choice of control fit effectively in control systems where the probability of desirable outcomes is high and where more than one type of control system is applied. Read More