“When a team outgrows individual performance and learns team confidence, excellence becomes a reality” (Joe Paterno). Performance comes from self confidence, when people know they can do it, is the time when they will be actually able to do it. The Get Well Soon medi-clinic, is a private hospital situated in southern suburbs of Cape Town. They have special care wards as well as general wards. The hospital has two distinct classes of patients: one is the group consisting of elderly patients and the second one is the group of younger professionals, business people children. The second group belongs to a medical aid a hospital plan scheme run by an independent private company, Pro-Tect (Pty) Ltd. The costing method they use is conventional method. Costing methods are important and they should be carefully chosen in order to maintain the budgets and get revenues. The purpose of research is to explain how Get well soon clinic is trying to change its costing method from conventional to activity based costing which is a better costing system to adopt. Also it will assist in increasing the occupancy rate of GWS.
There are different types of costing methods: cost based pricing, value based pricing, etc. Conventional method which is being used at GWS is not appropriate and therefore, the occupancy rate is not up to the mark. Currently, it is adopted by this clinic which is more traditional way of allocating the production overheads which includes the overhead rate which is calculated using direct labour hours. It relies on irrational rather than cause-and-effect allocation of overheads. It does not provide accurate product cost. It cannot analyse non-manufacturing costs. Now, GWS should change its costing method from conventional to activity based costing. ABC method is much better way of calculating different types of costs and allocating cost budgets to various departments. It is a better tool for serving different needs of various customers.
There are many business people who have this perception that best customer is the one that accounts for the largest portion of your income every year. The thinking goes wrong as this might not be the case every time because same customer might be responsible for major part of expenses as well. In order to determine how much a customer is costing the organisation, it must first identify the activities that each customer accounts for and determine the total cost sopped up by those activities. These activities should be taken into consideration to measure the level of activity absorption by each customer. The main purpose of implementing ABC method in an organisation is to segregate these activities into individual cost drivers. Then, all you have to do is measure each customer's participation in the specific cost operators. Therefore, in this way GWS can design their service as per the different needs of various customers.
The main aim of the system is to reduce the overhead costs but is should be done carefully as it should not result in reducing the number of personnels. It evaluates cost of individual activities, which is based on the resources available. It enables accurate costing for all the activities in an organisation. It helps in identifying which activities cost more and which cost low, so that expensive ones can be looked for and improvements can be done. It is a useful tool in process improvement in an organisation. It helps in forecasting costs for future activities which assists in budget planning and accordingly managing the products and services before launching anything new. Expenditure and profits can be calculated accurately.
In the current scenario, management people face global competition and increased productivity in the changing environments. Clinics are customer focussed and therefore, providing quality at competitive prices should be the area of interest. It has been proven by some studies that the perversion in product pricing can be minimised by ABC costing system. It is a modern costing technique used to determine cost of the product for management reporting purposes. It is used in decision making process (Monczka, Gruman and Saks, 2011). Today the world outside an organisation is immensely competitive therefore, in order to cope up with such situations an organisation needs to be updated and match up the demands. ABC costing is one such method that will help the organisation in achieving a competitive advantage. Organisations need to improve their quality, authenticity and reliability and consistently reduce costs in order to compete and qualify. Overhead costing is a problem for most of the companies. ABC thus helps in controlling cost. It is a powerful concept that can be developed and used by an organization to better understand organisation's gross cost behaviour.
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At GWS, there are three cost drivers which affect the clinic's overhead costs: patient days in private and semi- private wards, patient days in the special care ward and the number of patients admitted. To manage all these departments there are a number of employees, doctors, other support staff and consultants appointed. They incur a cost to the company. Overheads increase with the size of the company. Due to budgets uptil now the costing system being used was also traditional and not advanced one. But to make it cost effective, introducing an ABC costing system will be an investment and not a cost. To earn better, achieve improvised occupancy rates, costing system needs to be upgraded. The main aim of ABC is to develop cost information in such a way that it will reflect the current relationship between costs, activities and products or services. However, a common perception prevails that ABC is a complex set of mechanics which needs to be integrated with the routine reporting system. It is also considered that this system is only for large organisation because of its initial set up cost (Taticchi, Tonelli and Cagnazzo, 2010). It is true that budgets go out of the way for implementing this kind of expensive system but it is worth the money. Any organization can make an efficient economic model of its business with ABC and it will support all kinds of management decisions in the company. It has been recently brought to public attention that ABC system is rarely used by service sectors. Currently, using the traditional method of costing, the clinic is allocating indirect costs to the employees working on the basis of direct labour hours. By using only labour hours to assigning the overhead to services, it indicates that labour hours are the primary cause of overheads. Therefore, the traditional method of cost accounting is inadequate.
The implementation of ABC costing system will be appropriate in order to make it cost effective and manage the overheads in a better way. There will also be an increase in the prices for the next few years to manage the expenses of the clinic. It is due to the inflationary increase which is affecting the expenses and to account for the same 5% increase in the cost is the requirement. This will also help in implementing a better costing system. The budgets will be adjusted and able to carry forward these expenses. It should be communicated to all the medical aid schemes, administrators that is the Pro- Tect to comply with the new pricing scheme. This step will have to be taken in order to achieve better occupancy rate and competitive advantage. It will also help the clinic to manage the expenses in various activities and in providing wages to the workers. Activity-based costing has become a major cost estimation and accounting methodology. This technique can be used for cost calculation, it is being practised with a considerable rate of success.
The advantage of ABC system is that it allows accurate calculation of direct and indirect cost. Its existence proves the acceptability of ABC as a potentially valuable and innovative costing method that adds value to the performance management system. The major difference between ABC and traditional cost system is: traditional system uses actual departments or cost centres to define cost pools to accumulate and redistribute costs. Implementing this project is not a minor exercise. There are some difficulties which organisations come across during the implementation of these systems, they are: data availability, relevant data, possibility of data assumption, staff collecting data are available and knowledgeable and a project team. These are the requirements but how precisely they are available is to be taken care of. Activity Based Budgeting is a part of Activity Based Management System that draws its conclusions from activity based costing (Guest, 2011.). ABB analyses the products or services to be produced, what are the necessary activities to produce those products or services, and finally what resources need to be budgeted to perform those activities. In other words, ABB is the reversing of the ABC process to produce financial plans and budgets. It concentrates the elements that incurs cost and not only on the historic expenditures. ABM is defined as the action taken by manager based on the ABC study to improve the effectiveness of activities and profitability of products. This is done in order to make optimized use of resources to get the maximum outcome. Organisations use to build different models for customer and product analysis and due to expansion of models across units they could not take a holistic view of cost and profitability. ABC has helped many service organisations to improve their competitiveness which can be done only by better decision making that is based on an advanced understanding of their product cost behaviour.
“Organisations need to shift their approach by creating a culture where regular performance feedback discussions are the norm” (Melany Gallant). Various organisations use different measurement criteria s. Corporate experts give credence to activity based costing which is probably the best method for measuring business. Different soft wares are required for implementing these systems that adds to the cost. In ABC costing system, the project is distributed into activities and each activity is assigned a cost. The cost estimate includes equipments, employee salaries and machinery costs along with overhead, for each activity. Adding up all activity costs gives the total cost estimate for the whole project. ABC method gained popularity in the recent years. It was due to the evolution software supporting systems, use of internet and business intelligent systems that account for ABC's success.
Spreadsheets can be used for ABM models, but it can help only in basic type of analysis. Today there are many soft wares available to sort the needs of different customers and provide the best quality service. Database tools with a lot of functionalities are available for carrying out activity based analysis. Examples of some soft wares are ABM toolkit, Leeds Software, etc. (Mills and Smith, 2011). ABC methodology is giving the best and optimum solutions for cost based problems.
The problem being faced by GWS is that the administrators of medical schemes are concerned with the increased per day rate that is charged to their organisations on behalf of their clients. It was already towering last year, and an increase of 5% this year as well is not acceptable by these administrators. But looking at the occupancy rate, GWS clinic needs to increase per day charge in order to cope up with the expenses of activities. The services are not that unduly expensive as compared to other private hospitals. Therefore, an increase in the rates is acceptable and Pro- Tect company do not object on the increase as they did not comment on it.
As it has been seen in the above discussion that the method used for costing or analysing the cost was ABC. The reason behind applying such method to Get Well Soon clinic is to form an organised working. For any clinic or company it is very important to involve a structured and organised form of working, when it comes to the costing department. To get costing of any service it is very important that services should be done in an organised manner. In order to work in this manner I have introduced a new form of costing in our clinic which has been discussed above (Yang, Hong and Modi, 2011). The main reason of creating such method is to gain cost effectiveness. But when Dr. Gret visited the clinic and heard about the scheme of costing. It was totally inappropriate in every manner. According to doctor the main purpose is to give membership to the consumer and make the vacancy fill. By using this method clinic will get members for insurance as well as the costing can be generated. But in my opinion this is not an appropriate approach, though it will generate costing by providing as well as the members will be there but it will not provide systematic form of work. Costing can be generated by both the ways but the main question arises that which of the way is much more effective. In this method which is suggested by Dr. Gret, costing has been generated and on the other hand clinic is having number of patients. It may seem attractive to the consumer as the cost at which medical care is being provided to the consumer is less. But there are drawbacks in the method suggested by Dr. Gret.
There will be no organised form of work as well as there shall no changes to bring up. This method can be adopted by clinic when it has to work on short term. But as it is a medical care service provider, an industry to work on long term so it is necessary if any changes has been made in terms of costing generation then it should work on long term basis. The reason behind adapting ABC costing method is. It is very systematic form of generating method. A work can be easily carried out if it was done in a system. Though it is true the the cost which have been applied in ABC is much more high by which the consumer will not avail the service but it will the same as in other method if 10 persons are availing service at the cost of 1000 and here in ABC 2 at 1000 then generation of cost shall be the same but the difference which is concluded from both the method is that one has been carried out in an organised manner and the other is not.
As suggested by Dr. Gret, I should not take much notice of medical aid schemes and concerns, as we have our own expenses and our rates are not much towering. The main customer who is giving major number of clients is Pro- Tect and, they have no comments about the increase in prices (Bunse and et. al., 2011). Therefore, our increase is reasonable and we should go ahead with this policy. Prices for Pro- Tect should be kept low as suggested by doctor, but in that case we will be discriminating other clients and this may affect our brand image. Pricing differentiation should not be the strategy in order to keep only one organisation happy. Word of mouth marketing will spread this news of charging different prices from various customers. In order to increase the occupancy rate, we cannot ignore the other factors and simply concentrate on one component, it may affect other things like brand image, other clients may be gone, etc. I suggest we should think in an integrated manner and give it a holistic view.
The activity based costing system should be implemented within one or two years after earning profits and setting the budgets as it will organise the system in a better way and cost based problems will be solved easily. It will not be implemented without planning the expenditure, but in near future there should be a plan of doing so. There are a lot of things that need to done at the same time without compromising on the quality of service being provided. The GWS clinic has the capacity to serve more clients with well equipped system and sufficient number of employees. This is an advantage which should be used and client base should be increased (Berndtsson, 2010). One scheme can be introduced that if one member applies for four memberships at a time then there is a discount given to him/her. In this way, implementing the costing system along with increasing prices as well capturing the market share can be managed at the same time.
The research helps us to understand the need of changing the conventional costing system to the more advanced activity based costing system which will give Get Well Soon clinic a cost effective solution for its increasing overheads. It explains that how each activity is given weight age and accordingly decisions are made. It gives an organisation a competitive advantage, though it is time consuming and expensive. It is an investment and not a cost. Clinic should increase their prices by a small amount in order to cope up with their expenses. GWS wants to increase their occupancy rate as well. The administrators of other medical aid schemes do not agree with this increase by GWS in per day rate because it burdens their resources. But this is not a point of focus, as Pro- Tect their major client is comfortable with the increased pricing. It also helps us to understand that how GWS will cope up with this scenario where it needs to increase the prices, which others do not support and at the same time increase the occupancy rate along with this applying an advanced cost based system.
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Ernst, H. and et. al., 2011. “Customer relationship management and company performance—the mediating role of new product performance”. Journal of the Academy of Marketing Science.
Gandhi, A. and et. al., 2010. “Optimality analysis of energy-performance trade-off for server farm management”. Performance Evaluation.
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