Accounting dissertation

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.


This report discusses the health care sector and the use of cost accounting in health care sector. Health care sector deals with the treatment of illnesses and promotion of health. Health care sector achieves the aforementioned functions through medicine, dentistry, complementary and alternative medicine, pharmaceutical drugs, clinical services, nursing and allied health professionals. In addition to it, healthcare is divided into two specialties: medical specialties and interdisciplinary specialties; the famous medical specialties are anesthesia, cardiology, nephrology, neurology, etc; the famous interdisciplinary specialties are general medicine, forensic medicine, pain management, sports medicine, etc. The modern day protocol in health care sector is to use interdisciplinary teams.

The second section of the report discusses cost accounting. Cost accounting is a part of management accounting that identifies, collects and records all elements of the costs incurred to produce something or achieve objectives. The purpose of cost accounting is to provide information for the internal users of the accounting information; the internal users, decision makers, use the cost accounting information to make business decisions. Cost accounting serves a lot of purposes; some of those purposes are: scorekeeping, budgeting, cost reduction analysis, pricing, cost-benefit analysis, and system development & maintenance.

Health care sector primarily include hospitals, laboratories and research & development department. With the patient care depending on so many departments and units, the fee charged to patients should incorporate all the relevant departments and units. Currently, hospitals use marginal costing to charge their patients. Under marginal costing, the cost of each department is averaged out and then passed onto the patients. A scrutiny of the technique shows that there is an inherent flaw in it  it leads to poor estimation of true costs.


Health Care Sector

Health care, often written as healthcare in British English, refers to treatment and management of illnesses of the elderly and preservation of health through the services offered by medicine, dentistry, complementary and alternative medicine, pharmaceutical drugs, clinical services, nursing and allied health professionals. The term  Health Care is very broad and encompasses various fields of medicine that comprise it. Those fields are divided into two categories: medical specialties and interdisciplinary specialties; some of the medical specialties are anesthesia, cardiology, dermatology and the like, and some of the interdisciplinary specialties are general practice, bioethics, diving medicine and the like. The medical research is divided into two categories: clinical research and preclinical research.

The sector majorly includes hospitals, dispensaries and laboratories which includes in health services as well as research activities. All of them are getting bigger in size both in terms of operations and number of services being offered. There are categories of customers who appear for most of the services include insurance and self paying customers. Insurance customers need somehow different kind of service to be rendered compared to the self financing customers.

The idea of hospitals are changing slightly because now they are investing more on financial side as well, for most of the major hospitals the financials are controlled by specialized financial advisors because the extent of work and operations are increasing in a way that special finance advisors are required to control all the operations and make costing decisions so that right prices are being charged and they are given the right and full information about the annual results.

The health care sector is very essential to whole of the economy because it is an essential part of all the human lives and it serves as the basis for human development index which emphasizes the growth in economy and human living standard. The essentiality of this sector makes it essential for research growth and willingness to increase the operations because people are directly involved in getting the services from the hospitals and other research companies. The best way will be to scrutinize all the areas especially research and development sector so that operations can be improved and development can be seen in both the areas development of human index and standard of livings index. This will make the country s image and standard better compared to the other countries and will put the country in the way of developing or develop countries and the same effect will be seen in the other related areas as well.

From the above discussion it can be said that health care sector is one of the important pillars of a country which helps in deciding about the strength and quality of life of a country so better costing and quality control procedures can help in getting right budgets of R & D support and making comparisons in terms of research and return.

Costing Methods

Accounting can be divided into two categories based on the types of the users:

  • External users
  • Internal users

Financial accounting suffices the needs of external users whereas internal users are concerned with management accounting. A subcategory of management accounting is cost accounting that is of our interest.

Cost accounting, as implied by the name, is the method of accounting in which we collect, classify and record all the elements of costs that are incurred in carrying out an activity or accomplish a purpose. Once the costs are collected, classified and recorded, it is used to determine the selling price and/or determine where money can be saved. Cost accounting considers money as economic factor of production as opposed to financial accounting which considers it as a measure of economic performance.

There are various managerial accounting approaches that are used to collect, classify and record all the elements of costs. These approaches are:

    * Standard cost accounting
    * Lean accounting
    * Activity based accounting
    * Resource consumption accounting
    * Throughput accounting
    * Cost volume profit analysis

Cost classification is one of the most important functions of cost accounting. Costs are classified according to their common characteristics. The various prevalent cost classifications are:

    * By elements
    * By functions
    * As direct and indirect
    * By variability
    * By controllability
    * By normality

Cost accounting, as aforesaid, suffices the needs of internal users of accounting information. It has some very important functions that help the managers to fulfill the responsibilities of their jobs more efficiently and effectively. The various functions of cost accounting are discussed below:

Scorekeeping: These are simple reports presenting a trend line of the performance for a single key measurement

Budgeting: Budgeting is one of the most important functions of cost accounting. Budgeting helps in predicting by determining the future inflows and outflows of the variables for which budget is made and then managers can compare those projections with the actual flows to improve decision making process

Cost reduction analysis: Cost accountants identify all the costs incurred and their respective origins to see where costs can be reduced or completely eliminated

Pricing: Ideally it is the responsibility of sales and marketing team to price the products and products should never be priced below their costs; thus, the sales and marketing team uses the cost accounting information to know the cost of the products.

Cost-benefit analysis: Cost-benefit analysis is carried out when determining whether to acquire or dispose of a piece of equipment

System development and maintenance: It is the job of a cost accountant to collect data and analyze it. Cost accountants are interested in collecting a large pool of data to create a large pool of information consequently that can aid the decision makers. But collecting a large pool of data means incurring huge costs as well so a cost accountant should explore new types of data collection automation techniques to keep the data collection costs low

Costing Procedures in Health Care Center

Health care sector as an industry in growing at very faster rate, as previously it is also mentioned that what services are included in this sector and what services are expected to be included here. Taking into notice the rapid growth in this sector, financial sector has been getting involved in the practices. The procedures being used are average costing or marginal accounting for each new patient, this sector has become complicated for most of the hospitals because what there are a lot of categories now including insured patients and other self paying patients or sponsored patients; a lot of new software have also emerged with extensive coverage of almost all the operations.

The main categories in health care sector include hospitals, laboratories, and the most active department for recent health care sector research and development department. The major challenge in this sector is to combine the operations of the entire department and charge each customer according to the value each one will be getting, so that customer base can be retained and competition can be handled with efficiency.

The costing procedures being used now in the sector includes marginal costing in a way that averages all the costs for of each department and then distribute the costs to all the customers as they appear. This is really inefficient procedure these days as there are very sophisticated procedures available which can be used in the calculation of real concerned costs for each appearing customer. Many big financial and computer information system companies are working to improve the relationship between original costing figures and the figures which are used as charges for the clients.

From the past research papers it is evident that no established standard is available to cater with the costing figures, and suggesting one which can be used all the time for best results and right charges. Different hospitals are using different methods and hence are charging differently to each customer. It all depends on the size of the hospital and the practices of that hospital to include costs in the charges or not. The value which is created for patients can be derived from the formula below:

Value = Appropriateness of care x (Patient service Outcomes)/Costs

This shows that higher the costs lower will be the satisfaction level for patients, so if hospitals charge right costing figures to the patients the profitability of the operations and hospitals overall will increase automatically. For medical stores and laboratories the costing is done on inventory basis for medical stores and on client basis for laboratories, so in medical stores the costing figures are drawn as they appear in inventory as average costing figure they do not use LIFO or FIFO as it makes operations complex for them. In laboratory the costing includes all the costs in the charges and they charge stated rates for each service rendered. These practices have also been supported and promoted by the software being provided for these operations, the activities are automatically included for considerations of costs.

Best Procedures

This section talks about the best practices which can be used to come up with the right costing figures so that the goal of a country to become the best rated on the quality of life index can be achieved. The best practices which are seen by the secondary research are averaging of the costing figures faced by all the departments and then distribute them all over the department, so that the right charges are being charged to all the customers and they can feel satisfied. The best practices are concerned with the practices which are currently being followed by many of the hospitals who are succeeding by adopting certain practices in the accounting.

The average costing practice is mostly used by many of the hospitals because in this area most of the departmental costs are being added and then they are averaged to be charged by all the customers, all type of customers which appear to get services from the hospital. The costs regarding R & D, overheads and other variable costs in this case the cost of doctors checking the patients and services in the room for each individual matter adds up to come up with the costing figures. The average costing method is used in hospitals for many purposes as it includes all the costs in it and then averages them to the figure of forecasted customers, and then come up with the charges. This methods is really efficient because it doesn t charge some of the customers more or less because it averages down all the figures and then charge each type of customer whether taking room or not, it charges same amount and in terms of comparison it makes it easier to compare the annual figures in terms of cost increase or decrease and then helps in analyzing it.

The FIFO and LIFO methods are also the one which can be used instead of averaging methods, both of the above mentioned methods can be used most efficiently in the medical stores or laboratories, but not in hospitals because it is not manufacturing firm it involves service rendering and providing health care all in the form of services no product is involved. The LIFO or FIFO which ever suits the company s standards should be used in terms of pharmaceutical companies but not for hospitals itself, averaging is the best option but all should be handled with care so that right figures are shown and budgeting can be effective.

Other accounting methods which use random or purpose accounting serve as problem creation in terms of comparison and division of costs to make yearly improvements and return on the investment in R & D which is the most important department in this industry.

Cost Accounting for Health Care Sector Improvement

Accounting is all about managing the costs of different areas in all the sectors but to be specific in health care sector, the area where one can get improvement is the area of overall costing and integration of all the departments to be included in coming up with final costing figures.

Cost Accounting by Professionals

The industry is growing with rapid pace the best method to handle the costing is to outsource the process to certified cost accountants who are professionals and have knowledge about handling the same businesses and they are well aware of the operations and bottlenecks, so by hiring the specialized professionals they can help in making the efficient decision making and help the company prosper.

Cost Accounting for R & D Support

The best way is to outsource the activities to specialized professionals, and they must be aware that the most critical decision is regarding R & D department because this is the only way where hospitals can get competitive advantage over others. The most critical decision involves R & D return and potential for future benefits from the same area, so right costing procedures are required and update information should be included in the software which will be most probably handled by the specialized professionals. If the costing is not done with extreme care then the return on investment and future benefits in terms of new clients and revenues will not be estimated efficiently and the figures will distract and overestimate the expenses or underestimate the return on investment which will be detrimental for the hospital because this will not encourage them to invest further in the area.

Cost Accounting for Decision Making

Cost accounting methods are justified for the importance in R & D department but for the importance in other areas other than R & D, which includes room services, examining fees and prescription or check up costs, these all costs add up as a total cost for a patient and any one of these if poorly calculated can harm the likelihood that the customer will come back. Apart from the satisfaction the decision making is done based on the cost figures and then returns based on the costs calculated, all the returns then justify the decisions to retain the operations or modify them so in terms of justified and right costing figures the profitable operations can be retained and it can be made sure that improvement is getting on the way so that profitability and overall human index can be improved and valuable contributions can be made both in economic progress and in terms of revenue and profitability increase for the hospital.

Cost Accounting to Retain Customers

The professional handling the accounting system can help in retaining the most profitable customers by identifying selecting and targeting the right ones which appear more often for rendering services; they can be offered heavy discounts at the right time selected by decision makers and by charging the right price to them so that they are satisfied with the service and are willing to come to the hospital more often because they will be satisfied in terms of value they are getting as they will be aware of the services their relatives or friends will be getting from other hospitals or clinics.

For pharmaceutical companies separate accounting professional is not required because the accounting being used in that area does not include complex procedures or data sets, there are simply FIFO or LIFO standards being used which ever suits well, and in terms of costing margin is simply added to the cost and it is made easier to get profits as stated or targeted.

Cost Accounting for Profitability

Cost accounting includes two major methods to come up with the right charges or price: marginal pricing and markup pricing. Mark up is done on cost and margin is found in other way, most of the companies just add mark up to come up with the right price and then charge that price to the customers and get the marked profits on the annual basis. The profitability is easily affected by the costing methods being used mostly differences occur in FIFO and LIFO method which are more appropriate for pharmaceutical companies, and for hospitals it does not matter because here averaging is being done and certified professionals handle the operations and are put in charge to fulfill all the standards which are required internationally as well as nationally because that is what they are responsible for and they are being paid for.

Cost Accounting to Disperse Salaries

Costing is directly linked to profits and these figures are then related to salaries and benefits figures which are then dispersed to the relevant staff. In hospitals it is being decided by the charges doctor set for themselves and other related staff are being dispersed in terms of salaries. In order to make sure that they are not being overpaid there is a need to make the costing figures true and representative so that no overpayment is done. So in an effort to keep the staff motivated to work and make improvements it is important to pay them well, according to the profits because they are well aware of the profitability and operations success.

Cost Accounting with other Information Systems

Costing is done separately with the other financial accounting procedures; the result can be improved for financial accounting procedures by increasing the coordination in the outcomes of both of the accounting methods. Costing outcomes are used in financial accounting for recording and analysis purposes, so improvements in cost accounting procedures will definitely effect the financial accounting procedures and will help company to track the financial in the most efficient and reliable way.


Costing these days is very crucial decision for all the businesses because they show the true picture of the business and in the health care sector it is most viable because of the increasing awareness among people about the charges and relationship of charges and quality service required. In this industry R & D is the most critical decision to be made, and this decision is well supported by the return it gives over the investment which is totally dependent on the costing figures which then shows the return. The most important task for hospitals is to make the efficient accounting procedures and integrate all the accounting methods for whole of the operations of hospital as a whole. The costing procedures must be devised in a way that they could also help in understanding the operations and improve the operations so that time to time improvements as quality improvements are made sure.

The recommendations will surround the idea of getting professionals on board (this decision will be taken by looking at the budget and goals to be achieved by a company), getting efficient software for accounting, inculcating the averaging procedure in the software, and letting the professionals know about the key decision making areas, and timeline where costs have to be apportioned so that prices reflect the true cost of operations and hospital can get the best they want in terms of operations improvement and R & D budget. For pharmaceutical companies the best way will be to analyze inventory time to time to get an understanding about the products which expire and get most of the sales, the same will be true for medical stores. For laboratories the operations will be tracked that from where the higher sales are coming so that more attention can be given to that operation and right pricing procedure can be used for that.


M Sakurai - Journal of cost management, 1989

MD Shields, SM Young - Journal of cost management, 1991

G Miller, TE Vollmann - Harvard Business Review, 1985

M Bromwich - Accounting, Organizations and Society, 1990  Elsevier

A. Barmouta: Authorization and Accounting Services for the World Wide Grid; Master thesis, University of Western Australia, June 2004, pp. 1-154.

R. H. Garrison, E. Noreen, P. C. Brewer: Managerial Accounting; 11th Edition, McGraw-Hill/Irwin, December 2004

R. S. Kaplan, W. Bruns: Accounting and Management: A Field Study Perspective; Harvard Business School Press, December 1987