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Introduction

It is reported that more than 70% of the NHS hospitals have implemented Patient-Level Information and Costing Systems (PLICS) and/or Service Line Reporting (SLR) according to the CIMA survey. As a system which calculates costs at the level of the patient episode, PLICS can benefit greatly from adopting the principles of activity based costing (ABC).

Costing system such as ABC/ABM can be implemented to the public service industry to generate better managerial information. The National Health Service (NHS) faces a major challenge to transform itself into a patient-centred organisation, while at the same time have to be more cost effective to save money. Therefore, ABC can be applied in hospitals to help identify and analyse different activities, thus to help the management understand what actually drives up the costs.

However from an economic perspective, it is not feasible to consider all individual cost activities. Therefore aggregated level of activities is used to determine cost drivers. In the following paragraphs, three departments in the hospital—administration, A&E and surgical ward, along with the application of ABC and other costing techniques, are discussed.

Administration Department

Hospital administration costs can be mercifully expensive. Costing is almost $361 billion per year in the USA alone, three times what is spent on cancer. Therefore finding a costing system that gets the most efficient results from administration is crucial, so that more can be spent on hospital's core duties of providing health care. However despite the rather costliness it serves a central purpose of effectively overseeing the hospitals activities and making sure care quality and safety standards are kept intact. This can be ...

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...ssing about the application of ABC in the departments above, we conclude that in a hospital activity analysis is designed to establish linkages between activity and resources consumed. By applying ABC in the hospital, a sound cost picture identifying the real drives of cost is generated. Only when a better understanding towards cost activities is gained, can the organisation cuts down its costs.

The basic principles are followed in the implementation of ABC within the three departments despite having different approaches. Due to economic constraints, sometimes aggregated activities are use when determining the cost drivers. Conventional costing such as reference costing which is seen as an inaccurate measurement of cost can also sometimes be used as a supplementary to ABC. The extent to which ABC is implemented can be determined by analysing the costs and benefits.