Health Finance and Accounting - Essay Example

Health Finance and Accounting Health Finance and Accounting Question Explain how activity-based costing differs from traditional costing, how and why is this distinction significant for the health care setting you have selected? I have selected nursing home” Activity-based costing is an approach that identifies the activities of an organization and assigns costs based on resources available for the products and services used. Indirect costs, also termed as overhead, are merged with direct costs in this model.

Concurrently, traditional costing is the process of allocating manufacturing overhead to products in accordance to a volumetric metric (Lal, 2009). The volumetric metric is measurable in hours of production machine or direct labor. An increase in the sophistication during manufacturing influences the costs of manufacturing overheads. This is because such an increase leads to a rise in the manufacturing overhead costs and a subsequent decrease in the hours of the production machine and direct labor.

Consequently, the machine and labor hours do not form the basis of the manufacturing overhead causes (Banerjee, 2006). Activity-based costing and traditional costing are unique because of the operational differences between them (Baker, 2008). The former costing process is complex while the traditional based costing is simple. This is because the cost depends on the charges appended to the activities especially during activity based costing. However, only the used up resources and the cost objects are required for cost evaluation in traditional costing (Baker, 2008).

The activity-based cost method can be adopted as the best cost management system in a nursing home. This is moderately attributable to the increased overheads and the proportion of miscellaneous products is both elevated and large. This will address errors and inaccuracies that characterize the traditional costing system. It is fundamental to acknowledge that a nursing home is a business setup that must address the market competitive rates (Baker, 2008). Consequently, the organization would need a cost management system that is highly reliable and accurate to thrive in a competitive environment (Lal, 2009).

The traditional cost system applies a single overhead collection in its accounting calculations making it inappropriate for the calculations of salaries, outflow and depreciation. However, the activity based costing recognizes and includes parts of the products and labor. This makes it tiresome and protracted in several nursing home perspectives (Banerjee, 2006). Question 2: “If this organization were to use traditional costing, how would you recommend that it allocate cost (direct, reciprocal, or step down)?

Offer a rational for your answer” In a nursing home, a traditional costing method will likely render the final accounting procedures inadequate because one cannot tell the exact cost of meeting the customer specifications (Banerjee, 2006). However, a direct allocation of cost will be recommended. This implies that each product and service delivered will be allocated a manufacturing overhead. The nursing home will do calculations by allocating the number of hours that a physician spends with a patient and the number of drugs sold out.

The total number of all these hours will determine the organization’s financial statement (Drury, 2005). Fundamentally, the system is inflexible and may not allow sufficient maneuvering procedures. This will eventually limit the organizational costing and cost balancing (Banerjee, 2006). Question 3: “In summary would you recommend that this type of organization use traditional costing, activity based costing or both, Explain and justify your answer”. It is recommendable that the nursing home uses both the traditional and activity based costing for its financial calculations based on the dynamics of the health industry.

The nursing home is engaged in the provision of treatment services to patients and selling drugs to them. These require the assignment of direct costs to the products and the determination of the hours that the health practitioners spend with the patients. The traditional costing plays an imperative role up to this stage. However, a nursing home provides services and specific products to a special group of customers. Its services often go beyond the physical treatment of patients to include counseling and guidance, ambulance services and pharmaceuticals (Baker, 2008).

The traditional costing method might not be adequate for accounting purposes because it has shortcomings when it comes to including diverse products. As a way of correcting this anomaly, the activity based costing would be fundamental. This is because it applies diverse cost drivers in the allocation of the indirect costs that the nursing home will accrue. The nursing home incurs some small target costs such as fuel costs for the ambulance and other locomotives that require efficient decisions to be made.

The decision making process is simplified and ensures that the management concepts are target oriented and clear when the activity-based costing system is used (Leitner, 2007). This is unlike the traditional approach that is limited and tiresome. Besides, the activity based costing will help the nursing home to evaluate the performance indices of its employees and set the required standards. This will eventually allow the management of the nursing home to explore varied alternatives that will enhance its competitive nature.

Consequently, the management of a nursing home will acquire pertinent information for comparison purposes. References Baker, J. J. (2008). Activity-based costing and activity-based management for health care. Gaithersburg, Md: Jones & Bartlett Learning. Banerjee, B. (2006). Cost accounting theory and practice (12th ed.). New York: PHI Learning Pvt. Ltd. Drury, C. (2005). Management accounting for business. London : Cengage Learning EMEA. Lal, J. (2009). Cost Accounting. New Delhi: Tata McGraw-Hill Education.

Leitner, A. (2007). Activity based costing. Mu?nchen: GRIN Verlag.