How to design Activity based costing for hospitals

Measurement tools for cost control

Vikas 2.0 for Activity based costing in hospitals

Activity Based Costing in hospitals is a prudent tool to know the real cost and profit centers in a hospital. ABC projects are usually initiated to improve economically rational pricing and budgeting practices. It provides robust data that accurately reflects how expensive resources are consumed. We provide smart sensor integration to track the movement of hospital equipment within departments using RTLS solutions.

ABC offers advantages over traditional costing because it relates costs to activity drivers rather than just fixed and variable costs. ABC attempts to reveal all activities contributing to the cost, thus allowing hospital managers to eliminate activities that do not add value and respond more efficiently to rising healthcare costs.

The benefit of implementing activity based costing in hospitals

The total costs for each cost object are divided into direct and indirect costs; the direct costs mainly include direct labor costs, direct material costs, and direct equipment costs, which can be accurately obtained from Vikas ERP for hospitals. The ABC method calculates the costs of indirect activities for each cost object.

We assume that there are n indirect activities Ai (i = 1, …, n), the corresponding total cost Xi of Ai,  and m cost objects Oj (j = 1, …, m). Under the ABC method, indirect costs Cij, a component of the Xi is allocated to Oj based on the cost driver Di. Herein, each activity corresponds to a cost driver.

The total volume of the cost driver, Di, is divided into the sub-volume for each cost object, dij. For example, assume that we want to calculate the indirect cost of the chemical test unit (Oj) in the laboratory department.

We can then assign the activity “receive test order” to A1 and the “number of orders received” to D1. Consequently, d1j, which is a part of D1, is the number of orders received for chemical tests.

The application of activity based costing in the hospital software system is helpful in the planning process and inefficient management of the budget. Information obtained under this account may be used for:

  • Assessing the degree of resource consumption,
  • Dividing resources between organizational units,
  • Analyzing the variations occurring between plan and reality,
  • Identification of activities that add value
  • Applying business intelligence in hospitals

RTLS solutions for hospital asset management

The objective should be to implement an aggregate, strategically oriented ABC while rejecting detailed, process-oriented ABC. The degree to which ABC goals are achieved depends on the economics of collecting data from hospitals and the value of the increased goodness of the data. We provide Activity Based Costing solutions using Indoor positioning systems for departments such as X-ray, Laboratory, Scanning, nursing station, surgical kits, linen, Front Office, Operation Theater, and maintenance.

Call us to know more about Activity Based Costing in hospitals, and hospital asset tracking that can bring measurement matrices.

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Vikas ERP
Duleep Sahadevan, Founder and director at Software Associates Information Technologies. Brings over 2 decades of expertise in Healthcare and logistics ERP software solutions. Done research papers on Return On Investment (IIMK 2008), Digital Self service (2014 Utrecht University), Design thinking (Utrecht 2022)