Question

Explain why a manufacturer with diverse product lines may benefit from an ABC system?

Explain why maintaining their medical services provider network is treated as a product-sustaining-level activity by Cigna Health Insurance?

Answer 1

ABOBbce No Spac. Heading Heading 2 Paragraph File EBR Styles Activity Based Costing is a costing technique that tries to overcome some of the deficiencies of traditional product costing systems which may, under certain conditions, such as high volume and product-diversity, calculate inaccurate product costs. The reason for these errors is often that the attributes generally chosen to characterize the costs related to a particular product are attributes of unit products (such as direct labor hours per product), whereas in reality many of the costs (such as set-up time, engineering change time) are related to batches of products, or families of products, or even all of a company's products. Additionally, traditional product costing systems have spread overhead as a function of direct labor hours per unit product. As the cost of direct labor hours is becoming a smaller and smaller percentage of product cost, this gives an inaccurate view of real product costs, masks the need to clearly account for, and reduce overhead costs, and focuses attention on dollar costs rather than on time cycles which are becoming increasingly more important.

mb muleasingly more important The hospital's goal is to deliver high quality care at low cost; and that's wh Activity Based Costing helps in getting the visibility into the costs. In hospital, you would have Revenue centers and Support centers. Profit/Revenue center brings in revenue for the hospital where as support center enables the profit center to bring in the revenue. For instance, Human resources department, a support center does not serve the patient directly, however without that | department you will not be able to recruit and sustain the workforce required for the patient care. Hence, you need to distribute the cost of having an HR department to profit centers and cost centers, such that the accurate cost of the center is reflected. Cost Center Profit Center (Service Provider) (Service User) Billing Operating Room Information Technology Blood Bank House Keeping Laboratory Pharmacy Social Services

A A A A -A - = = = 1 АВесер Аавьсах Аавосе Аавьсс A as Normal No Spac... Heading 1 Heading 2 Title Paragraph Styles Why do we need to allocate costs? Allocating costs helps in- 1. Accurate costing of an profit/cost center 2. Improving resource utilization 3. Rationing limited resources The intent of ABC in the hospitals is to understand and streamline the activities; the gist is to either reduce the cost of activities or streamline the activities. This in turn results in the reduction in cost to serve the patient. In addition, since you 'un-bundle’your costs, the data will enable you in greater understanding of the activities and resource usage. Remember you have limited resources and optimum use of them would certainly help in keeping the costs lower