NHS started on 5 July, 1948 and in one article (Sunday Times of 2 Nov, 2001.), Gordon Brown believes that NHS has shortcomings due to the poor management. The other possible causes are as variation in demands of patients, capacity of doctors and nursing, hospital’s infrastructure and location, low standards of pricing, uncommon services, etc. To overcome the challenges of 21st century, management needs accounting information on which they can depend and make strategic decisions to provide quality services with reasonable costs. So, Activity based costing (ABC) method is appropriate to overcome NHS deficiencies because it provides an accurate and clear picture of costs that how, when, why, where and in what manner. Purpose:
As the management accountant for NHS hospital I write this report for the senior management team. According to the article (Sunday Times of 2 Nov, 2001.), Gordon Brown believes that NHS has shortcomings due to the poor management. So in this report I explained the Activity-Based-Costing, understand how it is applicable in NHS and point out the possible causes for the variation in unit costs in detail. Overview of National Health Services:
According to the NHS Plan (2000), NHS started on 5 July, 1948. Since its establishment it is the most valued public service in Britain. In addition, NHS mainly funded from central taxation and several changes being made to overcome its shortcomings due to high growth rate. In one article (Ramesh, 2010), as mentioned that according to the NHS survey, the number of staff in 2009 have reached to 1432000 whereas average staff growth every year over the last decade is by 2.7%. Introduction of Activity Based Costing
In recent years the Service Sector has experienced the highly competitive situation and due to this managers are more focused on accounting information for making plans, for controlling and in decision making processes (Glautier and Underdown, 2001). Therefore, having accurate and more precise accounting information activity based costing (ABC) is an appropriate costing method. According to Weetman (2004), ABC is defined as “Activity Based Costing (ABC) traces overhead costs to products by focusing on activities that drives costs (cause costs to occur).” And for establishing ABC four steps are involved as:
•Indentify the activities incurring overhead costs.
•Indentify the cost drivers which drive the costs directly. •Create a cost pool for each activity and calculate the cost driver rate. •Allocate the costs to products using demand.
Activity Based Costing and Traditional Costing in Contrast
Activity CostingTraditional Costing
•Identify the cost pools.
•Cost pools are determined by the activities which incur costs. •Collect the costs in cost pools.
•Determine the cost driver rate by activities.
•Allocate the cost to service/product by product demand for the activity which drives cost.•Identify the cost centers. •Cost centers are determined by the nature of their functions. •Collect the costs in cost centers.
•Determine the overhead costs rate by services/productions. •Allocate the cost to service /product by calculating cost rate and product consumption regarding department’s cost. Based on contrast done by (Glautier and Underdown, 2001) & Weetman (2004)
Advantages and Disadvantages of ABC:
Advantages according to the (Baker, 1998) and (Weetman, 2006) are as follows: •It facilitates in decision making more accurately.
•Helps management to agree on a set of goals.
•Helps to establish standard of performance used for comparison purpose. •It allocates cost of the produced units/delivered services more accurately. •It helps to identify important and unimportant activities. •It helps in applying total quality management in the organizations. Disadvantages according to the (Hussey and Hussey, 1999) and (Weetman, 2006) are as follows: •ABC is not helpful tool in solving all problems of forward planning...