Dialysis Clinic – Activity Based Accounting

Activity based costing systems assumes that activities cause costs and that cost objects create the demand for activities. Whereas the traditional costing system adhere to the assumption that products cause cost. The purpose of activity based costing is to more accurately define the overhead and indirect costs and apply those costs to the product or treatment. The concept has been deemed vital for every business in cutting costs and increasing profits. Activity based costing provides managers with useful information they need regarding the contribution that each activity makes to overall profitability. ABC provides insights for managers about maximizing process performance. More accurate costing of treatment so that the treatment charge can be justified to show profitability. Better understanding of overhead, overhead expenses incurred and allocation of these overhead expenses to different treatment type (HD and PD). ABC makes it easier to understand for everyone, managers will have a better understanding of resources being utilized for each treatment type and will help them manage these resources properly, thus also aiding in better decision making. ABC Utilizes unit cost rather than just total cost, instead of bulking up expenses and taking these as fixed expenses for the clinic, these cots can be broken down into unit and allocated to the treatments to accurately calculate cost per treatment. Example, the labour/ nursing services and general overhead expenses under the tradition costing system were bulked/ total as fixed expenses and not being included as part of HD and PD treatment expenses. The alternative costing method makes visible waste and non-value added items. After costs analyzing with ABC, PD treatment remains profitable and HD is making a loss. This loss by HD treatment may be due to more labour and machine incentive. Looking at PD treatment, (labour) machine operations (technicians) is a non-value added item. The management may decide to use these...