A modified method of activity-based costing for objectively reducing cost drivers in hospitals

Area of Science:

• Healthcare Management
• Health Economics
• Cost Accounting

Background:

• Activity-based costing (ABC) is crucial for precise indirect cost allocation in medical services.
• The extensive data collection for cost drivers in ABC can be burdensome and time-consuming.
• There is a need for efficient methods to reduce the complexity of cost driver identification in healthcare settings.

Purpose of the Study:

• To develop an objective method for reducing the number of cost drivers used in the Activity-based Costing (ABC) framework.
• To simplify the process of indirect cost allocation in medical services while maintaining accuracy.

Main Methods:

• The proposed Cost Driver Reduction (CDR) method objectively selects surrogate cost drivers for each activity within ABC.
• Candidate cost drivers are evaluated based on their similarity to the proper cost driver using an evaluation function.
• The method temporarily allocates indirect costs using candidate drivers to assess their suitability.

Main Results:

• Application of the CDR method to laboratory tests reduced the number of cost drivers from seven to four.
• Cost estimations using the CDR method demonstrated accuracy comparable to the traditional ABC method.
• The study successfully validated the effectiveness of CDR in simplifying cost driver selection.

Conclusions:

• The CDR method offers a significant simplification of hospital cost estimation compared to standard ABC.
• It provides accurate cost allocation results, similar to the established ABC method.
• This approach reduces the workload associated with data collection for cost drivers in healthcare.