Application of Health Care Cost Accounting

This assignment delves into the practical applications of health care cost accounting, highlighting its importance in hospital management and healthcare system optimization. It discusses the benefits of implementing cost accounting techniques, such as improved resource allocation, enhanced financial planning, and better patient outcomes. The assignment also explores case studies and examples of successful implementations, providing insights into the role of cost accounting in modern healthcare.

HEALTH
ADMINISTRATION AND
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
NHS........................................................................................................................................1
Cost accounting system..........................................................................................................1
Different types of cost accounting..........................................................................................3
Advantages of implementation of the cost system in the NHS..............................................7
Problems of execution of the cost system in the NHS...........................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Costing system is framework which is utilised by the different organisation to
estimate the cost of their products and services for analysing the profitability, valuation
of inventory and cost control. The report includes the different types of costing system
such as job based, process, absorption and activity based which can be calculated on the
basis of the purpose of the organisation. The report also includes different advantages
such as reduction of cost in several activities as well as problems while implementing the
costing system such as heavy cost, lack of trained staff.
NHS
National health service is the national healthcare system which is publicly funded
for England and forth health services in UK. They are the oldest and largest
single health care provider all over the world. They are primarily funded by the general
tax system and overseen by the health department (Fleischmans and Parker, 2017). They
serve different products and services related to the healthcare to the resident of the
England. They give some service for free to everyone such as treatment of the diseases
which is infectious, emergency treatment etc. They give their services to the visitors also
free of cost. Their free services come with their foundation principle, that principle is
founded by the National health services by the Labour government in 1948 where they
have given the statement that is “free at the point of use”. Which states that, every one is
legitimately fully registered with the system whether they are the local citizen of the UK
or the visitors, can access non-critical and critical health care without any out-of-pocket
payment. Some of their service are chargeable that need contribution of money such as
eye check-ups, prescriptions. Dental care and the operations which consist of long term
care. These services are also not free for low wage earners and if not free then they
charge less amount as compared to the private health care organisations. They provide
majority of services to people living in England which includes in-patient care, dentistry,
primary care, ophthalmology and long run health care. The large amount is funded by the
general taxation whereas the small money is from the National insurance (Christ and
Burritt, 2015).
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Cost accounting system
For estimating the accurate cost of the different products and services of the
organisation is very difficult in the profitable operation, for that the venture must know
that their products are profitable or not (Li, 2015). This can be done when the company
is able to estimate proper cost of its products. The costing system is made to monitor the
cost that is incurred by the companies. That reports are designed to communicate the
management about their cost, revenue and profitability. The financial information need
to be communicated to the different stakeholders such as customers, investors, different
departments, sellers, shareholders, creditors etc. companies need different financial
information so that they can reduce the cost of operations which generate high revenue
for the venture, they can decide where the cost is to be cut,when the business is at the
downturn situation, matching the standard cost with the actual cost in order to control
over the unwanted cost and make tactical and strategical plan for the operation that
occurs in the future (Ellul and Wang, 2015).
The cost accounting is generally made for the internal use so they need not follow
accounting framework for example IFRS and GAAP. The management of the
organisation will decide that what type of information they need and what is to be
ignored. The reports that generally created in the costing system are the actual versus
budgeted cost that have been incurred as the profitability report which can be
communicate to maintain the product line, sales region, stores and customers and
expenses reports that states the cost inured during the month or more than a month
(Schaltegger and Zvezdov, 2015).
In the health care organisation, cost accounting is not important, but it is difficult,
resource intensive and expensive. If the health care companies will able to implement the
cost counting in their business, it will be easy for them to attract large customers as they
can communicate their financial performance to their stakeholders (Fleischmans and
Parker, 2017). The health care organisation has to relate the cost with care and proper
quality of outcomes so that they create the balance between the delivery of the customer
care with the reasonable cost,
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The cost accounting system in the health care is the collecting, evaluating and
communicating the cost to the individual service to the patients. The small hospital
which do not need to maintain cost accounting, they can apply ratio of cost to charge.
This method helps the companies to use their Medicare cost report to step down the cost
allocation methodology. This method is made for the sound cost accounting system
(Lanen, 2016).
Different types of cost accounting
There are different types of the costing system which the organisation can apply,
but they need to keep in mind that what is the purpose of doing the costing system.
According to the different principles and procedure, the company need to select the
single method or multiple way to ascertain the cost of the organisation, different costing
system are as follows:
Process costing: It is costing system where the company need to identify and
analyse the manufacturing cost separately for the each costing. This costing is based on
the production process where the organisation manufacture the products in the different
department and the cost goes from one department to the other (Christ and Burritt, 2015).
This type of costing can be applied to the venture where all the products that are produce
are identical and do not have separate identity. The activities that are done in the
production process are the repetitive and continuous and move through the different
number of stages such as an organisation which want to produce wooden chair then the
raw material will go from the several processes such as cutting, jointing, colouring,
polishing etc. if the manufacturing process is continuous then they have different number
of parts where the inventory undergo to the process and different value added material
will be added to it so that finished goods will be produced. So the output which is
generated from the last process will be input for the next process. In this process costing,
the cost which is related to the each separate process or part are calculated and the output
of the every process is transferred to the cost to make the input for the next procedure.
The material which is considered as the input are collected from the different
suppliers or produced in house of the organisation. The material which is procured from
the outside will be part of the cost which is collected for the next process (Li, 2015). The
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process when ended, the produced goods is collected by the organisation so that they can
also identify the cost of production or total all the cost which is incurred in the each
process. This will help the company to calculate profit on the cost of production in the
basis of cost that have accrued in each step of manufacturing process. The organisation
must have emphasis on the different cost and them make costing such as when the
company is using variable costing then marginal cost is used and when absorption
costing is used then fixed overhead cost will be considered.
Job costing: It is the cost system calculate the manufacturing cost separately for
the each job. The organisation which is producing unique products or fulfilling the
special orders for their customers, job costing is effective for that type of companies.
This type of costing system is most appropriate for the event management organisations,
niche furniture producer, high cost A/c etc. This costing is used where each job is
different and need to performed for the customer satisfaction. This type of costing
system is useful for the tailor made products or the service industry., in this system,
where the direct labour and the materials cost is being identified and considered with the
small portion of the overheads and these helps the firms to identify the cost of the
particular job (Ellul and Wang, 2015). It is also called as the batch or contract costing,
this costing is made for identifying the cost related to the production of the goods in
batch.
Absorption costing: It is the costing system where the organisation ascertain all
the expenses or cost which have been associated with the manufacturing the particular
product and generally accepted by the GAPP principles. It includes all the direct and
indirect cost such as wages, raw material, overhead, utility etc. it is often contrasted with
the variable or marginal costing, in such costing the fixed manufacturing overhead cost
are allocated to the products that have produced. It is often used for the management
decision making. It is mostly used to communicate to the different stakeholders or to the
income tax reporting. It allocated all the cost to the final produced goods and services
(Schaltegger and Zvezdov, 2015). It helps the company to understand the extent at which
the cost are being covered by the sales revenue. The firm need to consider not just the
variable or direct cost but all the overheads which is being inured are need to be
considered. The overhead cost includes the opening cost, depreciation of the equipment
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and plant, wages paid to the employees, office and advertisement expenses. The
overhead cost are need to be allocated to all the products and services with the proper
allocation criteria so that all the cost is being allocated to the related products. The
organisation which have various factories, the cost of some may related but the cost for
the other location will vary and will be according to the firm's products.
Marginal costing: it is the additional cost that have been inured when the
organisation produce the one additional unit of the products. Most of the companies tries
to find the marginal cost so that they can increase their production level with the
standard cost or without increasing any additional cost. When the products is being
produced, some cost are fixed and some are variable, fixed are those which do not vary
when the company produce additional units whereas marginal are those which varies
with the change in units produces. The organisation ascertains this cost because they
make such decision which helps them to reduce the variable cost even when they are
producing more units of the products (Fleischmans and Parker, 2017).
Activity based costing: it is the costing where the organisation tries to reduce the
problems which have been inured in the absorption costing, they allocate all the cost
properly to the different products and services. In this costing, the company identify the
different activities that have been carried out in the business and then allocate the cost to
all that activities. After than they measure the contribution of the each of the operation to
the products and services. It is possible for every enterprise to allocate the cost which is
related to the everey activity with the products and services which the activity is
involved in the producing process. The cost is assigned are at the rational basis and then
the profitability of the each goods and services is being determined properly. It need
proper measurement and observation of the different activities of the machine and people
that ate involved and putting together to produce end products and services. After the
detail measurement the cost is being allocated fairly and at the rational way (Lanen,
2016).
In the pastime, most of the health care organisation use the activity based costing
which has mainly focused on the inpatient events. The health care organisation need to
understand the total program cost at the enterprise level where there is impact of the total
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cost on the patient who are outside. It is time where the different health care firm have
change their cost accounting system which involves different phases and it has changes
due to change in the Medicare payment mechanism which consist are as follows:
Cost plus reimbursement which is from the 1960's to the 1980's: It is the ratio
of the cost which is being determine the payment on the basis of charge plus mark up
value. The mark up value is for the cost which is inured on the payment of salary to the
staff, creating infrastructure, different operational necessities. These ratios are made at
the departmental level and the incentives are created when there is rise in price or when
they able to render more services (Christ and Burritt, 2015).
Prospective payment system from 1980's to 2010's: In such costing system the
health care organisation start classifying their patients on the basis of quality where they
determine the different payment level.
Value based reimbursement which is ongoing till now: In the current
environment, healthcare organisation uses outcome-based payment initiatives to
incentive their performance improvement in healthcare. It helps to measure the
performance, transfer the pricing for the internal purpose, determining the compensation,
qualifying the different opportunities and bundle the package pricing (Li, 2015).
The organisation need program based health care cost accounting for which they
require technology infrastructure that enables data aggression in all the setting of care,
they measure all the cost, quality and revenue projects in the proper way, all over view to
the performance of all the members for the quality measures (Ellul and Wang, 2015).
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Illustration 1: Health care cost accounting
(Source: Many uses of Health care cost accounting data, 2017)
With the enhancement of cost accounting data, most of the doctors and Physicians are
employing in the hospital based organisation (Schaltegger and Zvezdov, 2015). There is
drastic change have been occurred due to alignment of the doctors with the hospital so
the companies need to maintain the proper costing system which help them in several
ways as well as it cause different problems and challenges for them, that are as follows:
Advantages of implementation of the cost system in the NHS
There are several benefits that the health care organisation have after
implementing the cost system, they have attracted many doctors to align with them and
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work for them and this serve the several benefits to the patient at the one roof, different
benefits are as follows:
Track the data to analyse: For the National health system organisation, it is
important for them to analyse all the moving parts of their hospital, private practice,
clinic and healthcare provider. It is not possible for them to do all the calculation with
the hands in the today's fast moving world's as they were calculated in the past. As it is
very important for every health care organisation to collect the current data, analyse
them, compare with the past data and keeping the proper records in order to understand
where they are spending and how much they are spending to every individual activity
(Fleischmans and Parker, 2017). For the health care organisation, it is significant for the
heath care serve provider to know they best enhance on the cost without sacrificing the
quality of service and administration. They need to make assurance that they are keeping
the proper balance between the spending and quality of care.
StrataJazz Solution: Cost accounting for the hospital is one of the component of
the StraraJazz where they consider all the past data of the organisation are kept as the
records. By implementing the cost accounting, they will have more accurate reports and
that are communicates at the time of creating and changing the reimbursement contracts.
It allows the administration and doctors to have improvement in the guilty of care and
proper healthcare cost accounting (Lanen, 2016). This system is made so that they can
grasp the large margin from the patient and reduce the inefficiencies in all the areas. This
system helps the organisation to cut the spending and save money are that are clear from
the detailed modelling that what changes the NHS need to make at the different financial
sectors. It is back to back comparison of the indicators of the performance and the cost of
different doctors, physicians, clinicians and different service lines. They indicate where
the saving can be made at the different standard care
Problems of execution of the cost system in the NHS
Different problems that can arise when the organisation is implementing the cost
system, as is important for every company to ascertain the different cost that have been
inured in the various activities and lower down so that they can generate large revenue,
the problems are as follows:
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Lack of support from the top management: Sometime in the heath care
organisation, the Managing Director introduce costing system without having consent or
without any conversation with the department heads and members of the company in that
care they will not able to adopt the change and it will create problem in implementation
of costing system (Christ and Burritt, 2015).
Shortage of the trained staff: For implementing the new costing system hospital
need proper trained staff which can work on the system and carry out the fruitful results
by reducing the different activity cost. For that they need proper information to use the
system, if the organisation will not train their staff, proper result will not be drawn from
the system.
Heavy implementation cost: Different costing system involves the heavy cost
while developing and execution, which is done according to the specific requirements.
The service department will be needed by the costing department so that they can gather
all the information from every department so they need to make sure that all the data
they are collecting are relevant for the system otherwise it will create the burden for the
hospital (Li, 2015).
To resolve these problems, the heath care organisation NHS need to have proper
communication with all the staff and should take the consent from them that they will
able to adopt the new costing system. This will create the enthusiasm in the employee as
they fell that they are also important part for the organisation after participating in
decision making, the company should provide proper training so that they gain proper
knowledge about the system and draw fruitful result out of new system (Ellul and Wang,
2015).
CONCLUSION
It can be concluded from the project report that costing system is important for
every organisation whether they are small or big, private or public and service class or
production class. There are several advantages that arises after execution of the costing
system that includes proper communication of financial data, reduction of cost that occur
in every activities etc. There are various methods of costing system such as process, job
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based, absorption etc. which can be adopted by the organisation while considering the
policies and purposes.
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REFERENCES
Books and Journal
Fleischmans R. K. and Parker L. D., 2017. What is Past is Prologue: Cost Accounting in the
British Industrial Revolution, 1760-1850. Routledge.
Lanen W., 2016. Fundamentals of cost accounting. McGraw-Hill Higher Education.
Christ K. L. and Burritt R. L., 2015. Material flow cost accounting: a review and agenda for
future research. Journal of Cleaner Production 108. pp.1378-1389.
Rieckhof R. and Guenther E., 2015. Interrelating material flow cost accounting with
management control systems to introduce resource efficiency into strategy. Journal of
Cleaner Production. 108. pp.1262-1278.
Li X., 2015. Accounting conservatism and the cost of capital: An international
analysis. Journal of Business Finance & Accounting.42(5-6). pp.555-582.
Ellul A. and Wang Y., 2015. Is historical cost accounting a panacea? Market stress, incentive
distortions, and gains trading. The Journal of Finance.70(6). pp.2489-2538.
Schaltegger S. and Zvezdov D., 2015. Expanding material flow cost accounting. Framework,
review and potentials. Journal of Cleaner Production.108. pp.1333-1341.
Bierer A. and Sygulla R., 2015. Integrating life cycle costing and life cycle assessment using
extended material flow cost accounting. Journal of Cleaner Production. 108.pp.1289-
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Wan Y. K. and Tan R. R., 2015. Material flow cost accounting (MFCA)–based approach for
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accounting history perspectives. De Computis-Revista Española de Historia de la
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Weygandt J. J. and Kies D. E., 2015. Financial & Managerial Accounting. John Wiley &
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Mohr Z. T., 2015. An analysis of the purposes of cost accounting in large US cities. Public
Budgeting & Finance.35(1). pp.95-115.
Gebreiter, F. and Ferry, L., 2016. Accounting and the ‘Insoluble ‘Problem of Health-Care
Costs. European Accounting Review. 25(4). pp.719-733.
Lawrence, M., 2016. Activity-based funding: Clinical costing—The efficiency nexus.
Management in Healthcare. 1(2). pp.108-115.
Dwivedi, R. and Chakraborty, S., 2016. Adoption of an activity based costing model in an
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Üç, M. and Elitaş, C., 2016. Life cycle costing for sustainability. Handbook of research on
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Online
Many uses of Health care cost accounting, 2017[Online] Available through:
<datahttps://www.google.co.in/urlsa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0a
hUKEwi9x_Gb6v7VAhXLso8KHYaADxMQFggnMAA&url=https%3A%2F
%2Fwww.hfma.org%2Fdownloadasset.aspx%3Fid
%3D44961&usg=AFQjCNFnBFx9ilK2GHj9NmNP48vbcasmww>[Accessed on 30th
August 2017]
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