The Yale Cost Model and cost centres: servant or master?

Cost accounting describes that aspect of accounting which collects, allocates and controls the cost of producing a service. Costing information is primarily reported to management to enable control of costs and to ensure the financial viability of units, departments and divisions. As costing studies continue to produce estimates of Diagnosis Related Group (DRG) costs in New South Wales hospitals, as well as in other states, costs for different hospitals are being externally compared, using a tool which is usually related to internal management and reporting. Comparability of costs is assumed even though accounting systems differ. This paper examines the cost centre structures at five major teaching hospitals in Sydney. It describes the similarities and differences in how the cost centres were constituted, and then details the line items of expenditure that are charged to each cost centre. The results of a comparative study of a medical specialty are included as evidence of different costing methodologies in the hospitals. The picture that emerged from the study is that the hospitals are constituting their cost centres to meet their internal management needs, that is, to know the cost of running a ward or nursing unit, a medical specialty, department and so on. The rationale for the particular cost centre construction was that cost centre managers could manage and control costs and assign responsibility. There are variations in procedures for assigning costs to cost centres, and the question is asked 'Do these variations in procedures make a material difference to our ability to compare costs per Diagnosis Related Group at the various hospitals?' It is contended that the accounting information, which is produced as a result of different practices, is primarily for internal management, not external comparison. It would be better for hospitals to compare their estimated costs per Diagnosis Related Group to an internal standard cost rather than the costs from other hospitals. This is because there are differences in cost centre construction and standardisation of cost centre definitions will not meet the information needs of internal management. Also capabilities and capacities of accounting systems vary greatly and uniformity will take a long time to achieve, if ever.