Costing system at Cambridge hospital

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ABC costing


Cambridge hospital is US based health institution that focuses its synergies in providing specialized medical solutions to patients. The hospital that was started with a core mission to provide effective, efficient, and quality health services has been instrumental in mitigating the prevalence of diverse diseases that compromises individuals productivity. Historically, the hospital has been performing well in terms of service delivery. It has been able to provide superior and effective medical solutions to patients who hail from diverse locations globally. Its exemplary performance has assisted in building its reputation among local and international clients as most of them affirm its steadfastness in delivering tailor-made services. Despite its good performance in terms of service delivery, the hospital has been reporting dismal returns. Its profitability index has not been encouraging for along time. The dismal performance is attributable to the traditional method of costing and billing system that encourages misappropriation or pilferage of funds. The traditional method failed to facilitate effective allocation of resources, determination and servicing of overheads, and prioritization of major cost centers. The method is not good in facilitating decision-making on cost reduction measures.

Purpose and features of the old cost and billing system

As noted, the community health network adopted the use of a traditional costing and billing method to help in rationalizing its expenditures and returns. The method was adopted purposely or with a primary objective to facilitate effective allocation of resources, financing of projects, settling overheads such as administration and operation and savings. The method was also adopted to enable the health sector to manage its finances well and enhance functional capacity of all its business units. However, the costing and billing system failed to achieve its intended objectives. It became a liability to the company since it did not provide proper safeguards to financial misappropriation and establishment of aggregate cost information that relates to various each departments.

In particular, the cost method did not help in reducing the total cost of operation in the health center as expected. It failed to provide credible details that appertain to the cost associated with specific patients, DRGs and procedures. It also failed to give details about the costs that were associated with intern or resident program and interpreters including the use of nurse practitioners. Likewise, the method did not foster allocation of resources to diverse business units in order of priority. The costing and billing method exposed the institution to a lot of deficits, debts, increase in service costs and operating expenses. The company ended up incurring more costs than inflows as evident in the report where the service cost rose at a rate of 10% yearly. Operating expenses also rose to a total amount of 14 million. The rise in the expenditures shows clearly that the traditional costing method was not sensitive to the priorities of the institution. Key features of the costing method is that it is not flexible, it does not fully support priority based budgeting and it is involving.

Why the Hospital embraced ABC study

The hospital undertook or decided to embrace ABC study due to its effectiveness in supporting good decision-making that fosters cost reduction. The technique remains a viable cost reduction measure that any institution that seeks to manage its financials well should consider adopting. The costing method is appropriate for most institutions and it is recommended for use especially in the current business environment. This is because it provides solutions to costing and billing complications that traditional techniques cannot facilitate. Cambridge health center adopted its study and use since it facilitates priority budgeting including allocation of resources. The cost management method is assisting managers at the health center to identify appropriate cost centers and finance them in order of priority. It also helps in the reduction of cost of operation by ensuring that only viable service centers are supported. ABC costing method is suitable for the hospital given that it provides essential incentives that allows for establishment of actual costs incurred in diverse cost centers.

The suitability of PCU in the study

In the review of the case, PCU remains the best place to conduct the study on cost management and effective costing method. The institution is appropriate since it has been facing similar challenges that appertain to cost management as other institutions such as Cambridge health center. From the facts, the company had difficulties in reducing costs obligations and making credible decisions on cost reduction. It used a traditional method that failed to facilitate effective establishment information about the aggregate cost incurred by various service cost centers. The method also failed to provide reliable details about costs that are associated with specific patients.

The team that was contracted to design anew-costing system for the institution gathered data from diverse materials and individuals to establish the existing gap within its costing system. The data was collected from the hospital’s general ledger book, budget document, nurse practitioners, physicians and clerical salary documents. The team realized that the institution was using a step-down costing method that does not facilitate proper management of cost. It then recommended that the institution should adopt ABC method of cost management to help its management to verify the actual costs incurred in diverse service centers. ABC is fronted since it holds the capacity of enabling the hospital to solve the cost management complications that it faces.

The study’s view about the costs of using nurse practitioners, physicians, intern/residents, and interpreters to conduct services

The cost of using key medical stakeholders such as nurse practitioners, physicians, interpreters among others is justifiable in the health sector. From the study, these set of stakeholders play critical roles in the delivery of quality services to patients. The practitioners work as a team in ensuring prompt response to patients needs. In particular, they respond to their needs from the admission center where they give them specialized assistance. They respond to their phone calls and accord them interpretation assistance for those who are incapable of communicating in the language of the attendant. The stakeholders especially interns also helps in reducing the waiting times by patients for services. The study depicts CPU as the institution whose performance has been boosted greatly by the practitioners who include nurses, physicians, interns and interpreters. Therefore, hospitals should hire the stakeholders to enhance service delivery.

The nurse practitioner exam and translation wait time activity driver rates

Patient minutes/year = 9,440-9/60

Employee minute/year = 719

NPtranslation/ wait time = 1817/1101

NP exam time = NPvisits

36*60*50 = 108,000hours

(108,000/60)7 = 12,600 interpreted

= (252/380) = 0.66315

17,391*66.32% = 0.6632

= 11,533.7/1101

= 10.48 NP translation/wait time-interpretative (New)

Therefore, the NP translation/wait time-interpretative figure will change from 1.65 to 10.48

Summary of suggested steps for cost containment at the PCU.

Indeed, CPU health center requires an effective cost containment strategy and system. This is evident from the cost management challenges that it has been facing at its service centers. Variably, it is apparent given that the institution has not been able to make critical decisions that appertain to resource allocation on a priority basis effectively. The institution deeply requires a cost based system such as ABC to enable it establish its aggregate and actual cost obligations by departments.

The application of the cost management technique should follow a well laid down procedure to guarantee its functionality and effectiveness. The first step in the procedure should entail identification of the limiting factors to effective cost management. The second step should entail systematic execution of a feasibility study to ascertain the institutions capacity of supporting the program. Identification of suitable implementation mechanisms that can be adopted should follow. This step is critical in ensuring adoption of the right mechanism that holds the capacity of yielding the best results. The other step entails project implementation where the institution should integrate pertinent systems and programs to aid the functionality of the method selected. This should be followed by program’s testing and evaluation of its functionality.

The steps are imperative in promoting holistic adoption of effective costing systems such as activity based costing. They provide the requisite procedure that guides the process of integration that results to quality outcome. Therefore, UPC health institution should not procrastinate in adopting the steps due to their relevance in ensuring quality implementation of effective costing system.