Question

Select one of the costing systems and discuss in detail how this system could be applied to an ambulatory practice.

Answer 1

Answer-

A cost accounting system (also called product costing system or costing system) is a framework used by firms to estimate the cost of their products for profitability analysis, inventory valuation and cost control. Estimating the accurate cost of products is critical for profitable operations.

For appropriation of cost enumerated for ambulatory service, we should go with Activity-Based costing.

A powerful tool for measuring performance, Activity-Based Costing (ABC) is used to identify, describe, assign
costs to, and report on agency operations.

Reason for choosing Activity-Based Costing are-

1. ABC identifies opportunities to improve business process effectiveness and efficiency by determining
the “true” cost of a product or service. It prevails over traditional method of costing such as 'job costing' or 'product costing' in case of ambulatory service.

2. Classification of cost object are complex in case of Ambulatory service hence Activity Based Costing is a method for developing cost estimates in which the project is subdivided into discrete, quantifiable activities or a work unit. ABC systems calculate the costs of individual activities and assign costs to cost objects such as products and services on the basis of the activities undertaken to produce each product or services. It accurately identifies sources of profit and loss. therefore, we can easily.

However, Traditional costing system calculates a single overhead rate and applies it to each job or in each department.

Activity-based costing on the other hand, involves calculation of activity rate and application of overhead costs to products based on their respective activity usage.

Important Terms in Activity Based Costing-

The operation of the ABC system involves the use of the following terms:

Activity:

An activity means an aggregate of closely related tasks having some specific functions which are used for
completion of goal or objectives. For example, customer order processing is an activity. It includes receiving order
from customers, interacting with production department regarding capacity to produce and giving commitment
to the customer regarding delivery time. Other activities may be assembling, packaging, advertising etc.

Resource :

Resources are elements that are used for performing the activities or factors helping in the activities. For
example, order receiver, telephone, computers etc. are resources in customer order processing activity. It may
include material, labour, equipment, office supplies etc.

Cost :

Cost is amount paid for resource consumed by the activity. For example, salaries, printing stationary,
telephone bill etc. are cost of customer order processing activity. It is also known as activity cost pool.

Cost object:

It refers to an item for which cost measurement is required. e.g. a product, a service, or a customer.
Cost pool: A cost pool is a term used to indicate grouping of costs incurred on a particular activity which drives
them.

Cost driver:

Any element that would cause a change in the cost of activity is cost driver. Actually cost drivers are
basis of charging cost of activity to cost object. Cost drivers are used to trace cost to product by using a measure
of resources consumed by each activity. For example, frequency of order, number of order etc. may be cost
driver of customer order processing activity. Cost driver may be involved two parts:
1. Resource cost driver
2. Activity cost driver
A resource cost driver is a measure of the quantity of resources consumed by an activity. An activity cost driver is
a measure of the frequency and intensity of demand, placed on activities by cost objects.

Applying ABC, the below shall be the factors of consideration for measuring ambulance cost per visit.

Activity	Resources	Cost Object	Cost Pool	Cost Driver
Ambulatory Service	Ambulance	Ambulance Cost Per Visit	Running Cost, Driver Salary, Compounder Salary, petrol and diesel expense, maintainance cost	No. of vist
	Driver
	Support Staff

1 Activity- Ambulatory service is the activity for which cost is to be determined.

2. Resources- We need resources such as  ambulance , driver and support staff to provide ambulatory services .

3 Cost Object- The objective is to determine ambulance service cost per visit.

4. Cost pool- Cost pool shall include running and maintaince charges , salary and capital cost of ambulance service .

5. Cost Driver-- Pay per visit for ambulance service shall be the cost driver.