Assignment

Table of contents

Introduction3

The Definition of Activity Based Costing3

Cost Pools3

Cost Drivers4

Understanding Guy's St Thomas' Hospital in terms of overhead costs4

Guy's St Thomas' Hospital Systems4

Activity Based Costing -Possible causes for the variations5

Possible causes for the variations could be the following:6

Advantages and Disadvantages of activity-based costing8

The main advantages of activity-based costing are as follows:8

The Disadvantages of activity-based costing are as follows:9

The Traditional Costing Approach - Absorption Costing9

Drawbacks of absorption costing:10

Illustrating the cost effectiveness of using Guy's St Thomas' Hospital in Hospitals11

Conclusion13

These are the Health Business Issues - For a costing system which is not activity  based:13

Bibliography15

Assignment

Introduction

As the Management Accountant of a local NHS hospital I am going to write a report for the senior management team at the hospital that analyses the issues raised in the view attributed to Gordon Brown.

It is difficult to assume which allocation approach the hospitals have used, but I am going to describe the Traditional Costing approach and the Activity Based Costing approach, which I will describe in more detail.

 

The Definition of Activity Based Costing

Activity Based Costing (Guy's St Thomas' Hospital) is a 'costing method' (Fleming & McKinstry, 1998: 216), which recognises that costs are incurred by the activities, which take place within the organisation, and for each activity a cost driver may be identified. Those costs, which are incurred or driven by the same cost drivers, are grouped together into cost pools and the cost drivers are then used as a basis for changing the costs of each activity to the product.

 

Cost Pools

A cost pool is a collection of costs, which maybe 'charged to products' (Bendry, Hussey & West, 2001: 465) by the use of a common cost driver. Examples of costs pools are the power, material handling, material receipt, and production planning, sales administration, get-up cost and buying.

 

Cost Drivers

A cost driver is any activity or series of activities, which take place within an organisation, which cause costs to be incurred. Costs drivers are not restricted to departments or sections, as more than one activity may be identified within a department. Examples of cost drivers are the 'volume of raw materials handled in the organisation, the number of orders placed by customers or the number of machine hours' (Glautier & Underdown, 2001: 468).

 

Understanding Guy's St Thomas' Hospital in terms of overhead costs

Guy's St Thomas' Hospital emphasises the need to obtain a better understanding of the behaviour of overhead costs, and thus ascertains what causes overhead costs and how they relate to products. Guy's St Thomas' Hospital recognises that in the long run most costs are not fixed, and it seeks to understand the 'forces that cause the overhead costs to change over time' (Fleming & McKinstry, 1998: 224).

 

Guy's St Thomas' Hospital Systems

Guy's St Thomas' Hospital systems assume that cash outflows are incurred to acquire a supply of resources, which are then consumed by activities. In other words, it is assumed that 'activities cause costs and also that products (or services) create demand for activities' (Drury, C, 1999: 713). A link is made between activities ...