Management systems and methods developed by corporation especially the manufacturing concerns have helped the health care industry to reduce the financial pressure. Activity based Costing (ABC) system focuses on the number of significant activities performed in each department has helped many corporation to improve the quality of goods produced or services rendered and it also reduces the cost by realty based and rationale allocation of cost especially overheads better than other costing systems. Activity based costing is dynamic tool of cost management and assigns cost by considering the principal activities performed within the organization. This tool is currently being used in different industries but the use of activity based costing is not very old. Historical record reveals that during the era of 1990s the healthcare institutions adopt the activity based costing for the allocation of common cost. The activity based costing benefits the healthcare industry specifically hospitals in many ways by providing realistic and rationale cost allocation.
Activity based costing can be used in different hospital studies regarding historical trends, comparison of cost of different treatments by different physicians and treatment of class of patients or disease. Activity based costing is beneficial for the hospital but is not easy to adopt or implement ABC in hospitals. The conventional costing systems of hospitals should be redesigned and there is need to go beyond the certain fundamentals or dynamics of (Activity Based Costing). Activity based costing requires that there should be minimum wastage of the resources in order to save the cost deterioration. The allocation of common cost in rendering different services and treatments is the main cause of cost deterioration. The risk of deterioration is greater in organizations such as hospitals due to the fact that the common cost represents the major part of the total cost.
The activity based costing (ABC) requires that the hospitals should trace of services by using cause and effect relationship in order to avoid cost variation or deterioration. ABC attracts the attention on cost drivers in hospitals such as number of hours use of C.T Scan or number of X-rays taken by the X-ray machine. The proper and accurate understanding of cost driver helps in the management in managerial decision making of hospitals.
The application of the ABC in hospitals indentifies the non-value added activities which consume the significant portion of the economic resources of the hospitals. Hospitals should developed and adopt non-financial measures to remove the non-value added activities in the services rendered. It is not necessary that the elimination of the non-value added services will reduce the cost but it may improve the quality of the services rendered by the hospital. In healthcare industry especially in hospitals it is not appropriate to use the word “costâ€Â so emphasize should be on management of activities rather than on managing cost. This will increase the chances of success of activity based costing in hospitals both in private and public.
This study investigates the rationale and motivation of cost and management system in hospitals. It also focuses on the evolution of the cost and management accounting systems especially the activity based costing (ABC) and motivation for the implementation of activity based costing in hospitals. Activity based costing has been used in hospitals (Private and Public) in Finland and other European countries since the advent of 1990s. Healthcare industry across the globe has undergone significant changes across the globe since the advent of this century. Many countries of the world are using activity based costing systems in their hospitals public and private both and the outcomes have revealed that the implementation of activity based costing in health industry is successful. The adoption of activity based costing is dependent upon the classification of the cost centers the activities which consume the economic resources of the institutions. The cost is generally classified in two broad categories that is the cost which can be traced back directly to the individual patient which is termed as specific cost or the cost which cannot be traced back to the individual patient which may be termed as joint cost or common cost. The specific cost remains same in all the costing systems but the allocation of joint cost is different in different costing systems so that cost per unit of production of services at healthcare institution is different under different systems. The allocation of joint cost is more important in the healthcare institutions because the joint cost is the greater part of the total cost of the treatment of different patients e.g., electricity, building rents etc. This study will focus on the rationale of using activity based costing (ABC) in healthcare industry specifically in hospitals in county like Saudi Arabia which is significantly different than the other countries where ABC is success story. It also tests the universal applicability of activity based costing (ABC) in healthcare industry more specifically in hospitals.
Research Question
This prime focus of this study is on the rationality of using activity based costing (ABC) in the healthcare institutions of Tabuk, Saudi Arabia. Activity based costing has been used by different healthcare institutions and the outcomes of the adoption of the activity based costing reveals that the it is beneficial to adopt and implement activity based costing in healthcare institutions. This study will discuss and will try to make conclusion on the use and effectiveness of activity based costing in the healthcare institutions of developing country.
Literature Review
This study uses the organizational aspects which influence the adoption of activity based costing and rationalistic case studies regarding implementation of ABC. There is no specific agreement about the origin of activity based costing (Johnson, 1992, Lukka and Granlund, 2002). Johnson (1992), Lukka and Granlund (2002) state that the rationalistic views regarding the adoption of activity bases costing is that it is the most efficient method of overhead allocation or allocation of any other joint cost. Early studies reveal that the purpose of developing activity based costing is the growing importance of the overheads cost allocation due to the increase in the multi-production.
European studies regarding rationalistic implementation of activity based costing is qualitative but studies in US is quantitative (Bjornenak and Mitchell, 2002). Holford and MacAulay (1987) are the first one who studies the implementation and use of ABC in healthcare industry. Shields and Young (1989) introduced the concept of 7 Cs for the analysis of several case studies of the rationalistic implementation of the activity based costing. Activity based costing study at General Motors is based on the field study evidence and this study directly influence the outcomes of other studies on the implementation of activity based costing in hospitals (Foster and Swenson, 1997; Krumwiede, 1998; Gosselin, 1997).
There are some case studies which challenge the effectiveness of activity based costing. The diversity in the in production of goods and service change the overhead cost and there is significant chances that the activity based costing generate inaccurate results (Abernathy et al, 2001). Gosselin (1997) investigated the relationship between the motivation for the implementation of activity based costing and the organizational culture and design. Agbejule (2000) claimed that the existence of the relationship between the implementation of the activity based costing and factors beyond the control the organization.
Eldenburg and Kallapur (1997) and Blanchard et al (1986) studies the profit maximizing approach of private hospitals when the rates are limited due to different constraints. Hill (2000) provided the historical evidences on the adoption and implementation of the activity based costing in the hospitals of United States. The adoption and implementation of the activity based costing is motivated of calling themselves as modern. Brignal and Modell (2000) study the relationship between the organization aspect and the adoption of improved reimbursement scheme. Lapsley and Jackson (2003) explain the new diffusion perspective in which potential adopters is influenced by the current adopters of activity based costing. Brignall and Modell (2000) reveal that public healthcare institutions are under pressure to adopt the practices of private healthcare institutions. Llewellyn and Northcott (2002) revealed significant variation in the cost classification and allocation of in hospitals of UK as compared to the hospitals of other European countries. The public hospitals where private accounting practices were absolutely present are now moving towards the implementation of the accounting practices and costing systems of private hospitals (Lapsley, 2001).
The existence of both institutional and rationalistic is evident in the healthcare industry accounting practices but the rationalistic literature volume is limited and mostly related to US. The main conclusion of all most all the studies is that accounting practices and costing systems have symbolic role in healthcare institutions and clinician are disinclined to adopt management accounting systems.
Methodology
The methodology of this study is not very intricate. The current study focuses on the implementation and adoption of new costing system in healthcare institutions. The methodology of current study is divided in two phases that before the pre-adoption performance of the institution and the post-adoption performance of the healthcare institution. This study uses the case study of two hospitals and compares the performance of the hospitals before and after the adoption of activity based costing system. For better understanding and explanation of the difference between the Activities, based costing system and other costing system is vital and necessary for the better understanding of the difference in the performance of hospitals before and after the adoption of activity based costing (ABC). The aim focus of the study is on quantitative aspects of the sample case study but certain qualitative information will be considered for during the analysis for this study and formulate conclusion keeping in view of quantitative outcomes as well as the qualitative outcomes.
Before analyzing the performance of the hospitals before and after the adoption of activity based costing cost centers will be determined using the cause and effect relationship in tracing the service cost and its allocation. For the purpose of analysis each case will be analyzed independently and then after the comparison of results conclusion will be derived. The individual case is analyzed by dividing in to different segments such as ambulance service, ICU, X-ray department, Operation Theater etc. The results of different segments will be aggregated to critically evaluate the overall performance of the hospital.
Hypothesis
This study will test the hypothesis that there is rationality in adopting the activity based costing (ABC) in the healthcare institutions of Saudi Arabia against that alternative hypothesis that there is no rationality in the adoption of activity based costing. This study also test the claim that the application of the activity based costing system is universal or not.
DATA
The most of the healthcare institutions do not maintain the appropriate accounting information especially in the public healthcare institutions. The level of difficulty will increase in acquiring the appropriate data for the purpose of analysis if the focus of the study is on the comparison of two significantly different costing systems. The origin of this study is Tabuk, Saudi Arabia so the sample case study healthcare institutions will be selected from the local area which fulfills the desired requirements of the study.
The respondents of the data collection are the management officials of the two case study healthcare institutions. The two sets of data will be collected from the each study that is total four (4) sets of data will be collected. The total of four (4) data sets further is classified as before and after the adoption of activity based costing in the hospitals of Tabuk, Saudi Arabia.
Conclusion
In the literature of management accounting the growth in the implementation of the activity based costing is directly associated to the global evolution in production and perception of the management accountings for the adoption of activity based costing. The phenomenon of activity based costing was originated during the era of 1970s and 1980s in America. Traditionally the use of activity based costing is limited to the manufacturing organizations but after the remarkable success of the activity based costing (ABC) in manufacturing organization. The management accountant has widened the scope of the implementation of the activity based costing and ABC has proved its effectiveness in different environments. The concept of implementation of the activity based costing was given in 1990s and since then the activity based costing is being used in different healthcare institutions especially in private hospitals. The historical outcomes reveal that the use of activity based costing is beneficial for the healthcare institution.
The empirical evidences and historical performance record of healthcare institutions reveal that the performance of the healthcare institutions has been improved but the fact is that all these institutions are in developed countries or in the countries where number of patients who visits the hospital is greater due to the health insurance and social security benefits. The adoption of activity based costing in the healthcare institutions of Saudi Arabia will be beneficial for the healthcare institutions due to more realistic and rationalistic allocation of common cost on different services. The activity based costing will help the management of the healthcare institutions in Saudi Arabia in managing the activities of different departments in the treatment of different diseases. The objective of the public hospitals is the welfare of the community so the activity based costing will help the management in the management of the activities performed so that the maximum number of patients will get benefit. The private hospitals may often operate with the motive of profit maximization. The management of the private healthcare institution will decrease the cost using activity based costing in order to increase the profitability of the hospital.
