Order ready-to-submit essays. No Plagiarism Guarantee!
Note: All our papers are written from scratch by human writers to ensure authenticity and originality.
Healthcare organizations have continued to experience major challenges related to the development of the relevant and accurate cost of information for basing the strategies, pricing and management decisions. In the recent times, many of the healthcare organizations have started investing in sophisticated cost accounting systems such as the activity-based costing (ABC). Generally, activity based costing is a superior cost calculation system that allows resources cost to be allocated to products based on resource consumption (Vogl 2013, pp. 296). Commentators have claimed that ABC system has the capacity of providing great visibility to the healthcare organization’s process and the cost drivers. Hence, the system has the capacity of allowing managers in eliminating costs that are related to the non-value additional activities and improving the level of efficiency to the existing process. Such process is as well referred to as activity-based management (McLaughlin et al 2014, pp.3).
Various literatures have been advocating for the use of ABC by the services organizations, mainly the healthcare organizations, hence there is the need to take caution. There are potential drawbacks associated with ABC system that relates to the aspect of time and resource usage in connection to development and management of the system (Vogl 2013, pp. 293). A major barrier to ABC adoption relates to the high time and the costs of estimating the ABC model and maintenance. Many managers who have attempted implementing the ABC system in the organization have declined the attempt due to rise in costs and irritation of employees (Demeere, Stouthuysen and Roodhooft, 2009, pp. 302).
Check your essay before you submit. See exactly what your professor sees.
See your AI and plagiarism results before your instructor does.Get the exact same report your professor uses. Trusted by 50,000+ students worldwide.
To overcome this challenge associated with the ABC system, Time Driven ABC (TDABC) was developed. In general, the system can be estimated and installed faster since only two estimates are required. These estimates are related to the unit cost of supplying the capacity and the time required in performing a transaction or activity (Storfjell, Omoike and Ohlson 2008, pp.248). The advancement of the system lies behind the usage of time equations with an aim of estimating the time spent on each activity. There is an inclusion of multiple time drivers where the time driven approach on ABC tends to capture the complexities associated with the organization simply than the traditional ABC system. In general, TDABC offers various opportunities related to the design of the cost models mainly in environments that have complex activities such as healthcare organizations and the service organizations (Vogl 2013, pp. 290-293).
Theoretical Background of ABC and TDABC
Recently, healthcare organizations have applied more basic principles of ABC. According to proponents of ABC, there are arguments that, ABC assists the healthcare organizations in achieving an accurate understanding of the costs with avoidance of suboptimal and dangerous decisions related to the prices, control, planning and product mix (Storfjell, Omoike and Ohlson 2008, pp. 244). The main idea behind the ABC system in healthcare is that production of the cost object such as customers and products generate various activities that do consume resources such as equipment and wages. It is worth to note that, ABC system in healthcare organization depends on resource cost drivers in assigning of costs that are allocated to different activities such as the supervision and delivery of nurse care. As well, more allocation of costs has to be undertaken in the second stage utilizing the activities cost drivers that do measure the demands associated with the cost objects placed on the activities.
However, under the traditional cost accounting methods, overhead costs were treated as a homogenous lump sum and were divided by volume related base such as the total number of patient days (Witkowski et al 2014, pp. 399). Hence, the ABC model has assisted in achieving the advanced accuracy of estimation on costs, utilizing the multiple cost drivers. In addition, the produced ABC information ensures that healthcare managers are able to achieve the understanding of the core processes with the will of pursuing changes that increase values and the level of effectiveness of the firm (Storfjell, Omoike and Ohlson 2008, pp. 246).
According to Kaplan and Porter (2011, pp. 48-49), it was found that provisions of healthcare management with detailed cost analysis and essential cost as well as value achievement chances, in practice, it is not easier to implement ABC model. For instance, for implementation of traditional ABC system, one needs to survey on the employees’ estimates of the percentage of time spent or expected on distinct activities and then assigning the division resource expenditure in accordance to average percentage sourced from the survey (Witkowski et al 2014, pp.399). Generally, such approach works better in a limited setting, but there are challenges that arise when attempting rolling the approach on a large scale creates and maintain the ABC model in a large scale which may be a barrier on widespread adaptation in many organizations (Demeere, Stouthuysen and Roodhooft 2009, pp. 301-303).
Another issue associated with this system is the fact that it is associated with the use of single driver rate for each activity. Hence, it is challenging for the organization when it comes to modeling the multi-driver activities. For instance, patients who register costs in outpatient clinics depend on the number of patients being registered as well as patents (known versus unknown) (Witkowski et al 2014, pp. 399). In case the clinic works with an average cost per patient of $10, this may provide inaccurate cost information. However, there could be suggestions to split the activity to two activities such as registration of unknown patients and registration of known patients. Despite the process, splitting tends to inflate the activities in ABC which creates challenges when estimating for the practical capacity of the sub-activity (Gosselin 2006, pp. 645-647).
The solution to the issues related to ABC is not abandoning the system. Commentators were able to develop a new approach that would reinforce the ABC referred to as time-driven ABC. According to the system, the process starts as in the case of traditional ABC system with estimation of a cost associated with the supply of capacity (Popesko 2013, pp.1-2). In the case of healthcare organization, a practical capability is expressed as the amount of time that staffs are able to work without any idle time. In most cases, the practical time capacity is anticipated in terms of percentage; let’s say 85% or 87% on theoretical capacity. Dividing the total costs with the practical capacity, cost per time unit is achieved. The costs are assigned to cost objects after multiplication of cost per time unit by the time required in performing the activity (Witkowski et al 2014, pp. 399).
Generally, major advancement of TDABC relates with time estimation. Actually, time-driven ABC system applies an estimate of the time that is required for each time the activity is performed. It is significant to note that, the issue is not all about the percentage of time the employee will spend doing the activity (such as registering the patients) but the time it will take to complete in a unit of the activity (time required in registering one patient) (Ayvaz and Pehlivanli 2011, pp. 146). Additionally, not all the patients will be the same and will not require same amount of time to get registered. This creates a separate activity for the possible combinations of patient characters (unknown and known) or utilizes the duration driver on any possible patients’ registration combination (Donovan et al 2014, pp. 86-87). Actually, the time-driven system has the capacity of estimating the resource demanded with simple time equation. The time equations indicate how distinct time drivers (case specified characteristics) foster time spent on certain activities. In a complex situation, where the time expected to perform such activity is fostered by various drivers, TDABC has the capacity of incorporating multiple drivers for each activity. In such, the time equations achieve greater simplification of estimate process and offer accurate cost approach that is possible applying traditional ABC system (Inverso et al 2015, pp. 673).
Considering the same example of the patient registration, an assumption may be made that time required in registering the known patient will be two minutes. However, if the patient is new, the division head estimates the time either from experience or through various observations indicating that additional minutes will be required in registering the patient. A time equation for such example is:
Patient registration time per patient = 2+2in case of unknown patients.
After TDABC approach is set in place, the department heads, as well as healthcare managers, need to review the cost of all unutilized capability and contemplating the best action that would establish if and how costs may be reduced in a supply of unused resources for subsequent periods. Such actions are easier to be monitored over time (Popesko 2013, pp 13-14). As well, managers in healthcare organizations are easily capable of updating the TDABC approach to ensure there is the reflection of the changes experienced in the operational conditions. To add other activities relevant for the departments, managers are not expected to interview the personnel but can estimate the unit time that is required for each new activity (Öker and Özyapici 2013, pp. 25).
