Question

Identification and explanation of the main cost management problem using the cost management theory,
a.   Identification of (5) external or internal causes that originates the proposed main cost management problem,
b.   What should be Bay Area Health Network’s mission in the context of the proposed main cost management problem and internal and external causes?
c.   Propose an adequate ABC analysis for Bay Area Health Network’s situation to answer the questions presented in the case
d.   Define (5) cost management strategies oriented to solve the main cost management problem and how these strategies could be implemented in your proposed Bay Area Health Network’s cost management ABC management system.

BAY AREA HEALTH NETWORK ABC ANALYSIS BAY AREA HEALTH NETWORK (the Network), which is a newly created subsidiary of Bay Area Health System (the System), consists of five medical group practices. When initially acquired, the practices were placed in a for-profit subsidiary, but concerns over both Stark Law provisions and the fact that the practices were barely profitable prompted the System to place them in the newly created not-for-profit subsidiary. The practices include both primary care and specialty physicians, with an emphasis on obstetrics/gynecology, surgery, pediatrics, and psychology. Although the physicians are administratively organized into five groups, they practice at only three different locations, each one staffed with a physician mix of primary care and specialists. In spite of the fact that its direct contribution to system profitability is negligible, the Network is considered an essential part of the System because it generates a large amount of indirect income from both inpatient refer- rals and outpatient ancillary services. In fact, it has been estimated that each dollar of revenue generated by the Network leads to eight dollars of inpatient and ancillary revenues. By limiting the amount of ancillary services provided at the Network locations, patients are forced (or at least encouraged) to utilize Bay Area Hospital (the Hospital), the founder of the System, for such services. Still, some ancillary services are best performed at the Network lo- cations for one or more of the following reasons: lower costs, increased physician efficiency, and improved patient convenience. For example,

Answer 1

HOMEWORKLIB's guidelines, asnwered first question only. If you need answers to other questions, pls post them separately, sorry

Cost management is the process of planning and controlling the budget of a business. Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over budget. External or internal causes that originates the cost management problem:

Global Competition: Improved transportation and communication systems led to a global market for many manufacturing and service firms. Earlier firms didn't know what similar firms in India, Germany or China etc were producing. These foreign firms were not competitors because their markets were separated by geographical distance. Now, both small and large firms are affected by the opportunities offered by global competition. Cost information plays a vital role in reducing costs, improving productivity, and assessing product-line profitability.

Growth of the Service Industry: As manufacturing industries declined in importance, the service sector of the economy has increased in importance. The service sector now constitutes approximately threequarters of the U.S. economy and employment. The increased competition has made managers in this industry more conscious of the need to have accurate cost information for planning, controlling, continuous improvement, and decision making. Thus, the changes in the service sector add to the demand for innovative and relevant cost management systems.

Advances in Information Technology: Seemless connection with computer-integrated applications led to automated manufacturing, computers are used to monitor and control operations. Because a computer is being used, a considerable amount of useful information can be collected, and managers can be informed about what is happening within an organization almost as it happens. It is now possible to track products continuously as they move through the factory and to report (on a real-time basis) such information as units produced, material used, scrap generated, and product cost. The outcome is an operational information system that fully integrates manufacturing with marketing and accounting data.

Advances in the Manufacturing Environment: Manufacturing management approaches such as the theory of constraints and just-in-time have allowed firms to increase quality, reduce inventories, eliminate waste, and reduce costs. Automated manufacturing has produced similar outcomes. The impact of improved manufacturing technology and practices on cost management is significant. Product costing systems, control systems, allocation, inventory management, cost structure, capital budgeting, variable costing, and many other accounting practices are being affected.

Customer Orientation: Firms are concentrating on the delivery of value to the customer with the objective of establishing customer loyalty. Accountants and managers refer to a firm’s value chain as the set of activities required to design, develop, produce, market, and deliver products and services to customers. As a result, a key question to be asked about any process or activity is whether it is important to the customer. The cost management system must track information relating to a wide variety of activities important to customers (e.g., product quality, environmental performance, new product development, and delivery performance).

New Product Development: A high proportion of production costs are committed during the development and design stage of new products. Activity-based management identifies the activities produced at each stage of the development process and assesses their costs. Activitybased management is complementary to target costing because it enables managers to identify the activities that do not add value and then eliminate them so that overall life cycle costs can be minimized.