Applying Activity Based Costing (ABC) Method to Calculate Cost Price in Hospital and Remedy Services

Article excerpt

Abstract

Background: Activity Based Costing (ABC) is one of the new methods began appearing as a costing methodology in the 1990's. It calculates cost price by determining the usage of resources. In this study, ABC method was used for calculating cost price of remedial services in hospitals.

Methods: To apply ABC method, Shahid Faghihi Hospital was selected. First, hospital units were divided into three main departments: administrative, diagnostic, and hospitalized. Second, activity centers were defined by the activity analysis method. Third, costs of administrative activity centers were allocated into diagnostic and operational departments based on the cost driver. Finally, with regard to the usage of cost objectives from services of activity centers, the cost price of medical services was calculated.

Results: The cost price from ABC method significantly differs from tariff method. In addition, high amount of indirect costs in the hospital indicates that capacities of resources are not used properly.

Conclusion: Cost price of remedial services with tariff method is not properly calculated when compared with ABC method. ABC calculates cost price by applying suitable mechanisms but tariff method is based on the fixed price. In addition, ABC represents useful information about the amount and combination of cost price services.

Keywords: Activity Based Costing, Remedial services, Cost price, Iran

Introduction

From 1850s, medical tariff began in California by using coding method. First results of this information were published in 1956. In this method, a three- number code with a special listing was used for the classification of medical services (1, 2). Regarding weaknesses in tariff method in the late 1980s, most hospitals made their tariff's calculating method based on" Diagnosis Related Groups (DRG)". In this method, instead of fixed tariffs, cost price of hospital services was calculated based on the opinion of expert (3).

In the recent decade, by increasing varieties of complex activities and the importance of cost price in hospitals for managers and governments, understanding these changes and evaluating their effects on cost price is very important. Traditional costing methods, especially methods used in hospitals cannot practically meet these expectations. These methods determine cost price of offered services based on fixed price regardless of conditions in hospitals (1). Therefore, using proper and effective methods of costing is a fundamental necessity. For this purpose, "Activity Based Costing" (ABC) is introduced for calculation of cost price. ABC is one of the new costing methods with an increasing application throughout the world.

These methods, in calculating the cost price, apply complexity, variety, and specific features. A distinct feature of this method is the ability to diagnose exact costs and to present the non-financial information to improve the performance and efficiency of activities (4). In addition, by applying ABC method, organizational unused capacity resources can be diagnosed and decreased (5).

After the remarkable development and success of ABC method in industry, its application has been considered in other parts, especially in healthcare centers and hospitals since early 1990s. Kaplan had a key role in the development of this method (5). Meanwhile, by introducing ABC, the accuracy of calculated costs in health systems became so important for hospital managers, physicians, investors and governments, that over 20% hospitals in America and Canada used this method in 1990s (6).

In "General Zonal Hospital" in Argentina ABC method was used to determine costs of patient care in in 1998. This hospital provides services to 190,000 patients in 26 treatment units. Finally, cost price of services was calculated based on the kind of disease, it was very different from the available methods at that time (7).

A study was performed by a group of quality guarantee in America as ordered by WHO for the possible applicability of ABC method in developing countries. …