Cost Concepts - Essay Example

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It is crucial in decision-making and in solving problems that are internal in nature. It provides the mechanism by which cost accounting can be measured and could, hence, provide accurate cost information as well…
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Download file to see previous pages One can illustrate this in the case of the University of Colorado Hospital, a large academic hospital recently recognized as the highest performing academic institution in terms of delivering quality health care in the United States for 2012. Using traditional cost systems, resource allocation distributed across overhead expenditures are done according to a measured amount or volume of individual services or products. For example, in terms of maternity care, the overhead cost could be spread across provider compensation, direct and indirect hospital costs, emergency room, transport, pediatric and a host of other product/service elements. Cost accounting in this setting is straightforward: the total cost is measured as opposed to the measurement of a specific unit of the maternity service. Here, the outcome is fundamentally based on the attempt to determine how many units or the product or services are consumed. Activity-based cost accounting is differentiated from this system because it is more detailed and comprehensive in the manner by which it calculates the cost. There are three steps by which it implements the system as opposed to the mere calculation of resources consumed: 1) defining the activities that support output; 2) defining links between activities and output; and, 3) developing the cost activities (p.5). In the case of the maternity service at the UCH, for instance, it will include nonfinancial variables along with financial variables as bases for allocating costs. In addition, it will also employ a bigger number of cost drivers. It is, hence, more accurate in determining cost than the traditional cost accounting method. The impact of cost accounting is important. Hospitals like UCH will predict the cost on the basis of expected visits in assessments like the profit analysis model. This is significant is especially on the face of the increasing frustrations of healthcare finance ...Download file to see next pagesRead More
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