Healthy Hospital Costing Techniques

This article consists of 11 pages and 1397 words.

In order to get full access to this article, email us at thedocumentco@hotmail.co.uk

Ref No: 4051

Table of Contents

Healthy Hospital Costing Techniques 

Introduction. 

Current Position. 

Proposed Option 

Activity Based Costing. 

Advantages and Disadvantages of changing the costing system.

Recommendations 

Task 

Alternative Adoptable Pricing Strategies 

References 

 

Introduction

This report is a detailed analysis of Healthy Hospital’s Costing Techniques. It mainly draws comparison between traditional costing method and activity based costing method. This report will then take into account the pricing strategies that maximizes profitability.

This report will also help the reader take informed decisions about any alternative potential pricing strategies

Current Position

There are two elements of cost. One is direct cost and the other one is indirect cost.Direct cost is apportion directly. Therefore, no change will occur whichever method is used. Indirect costs are according to total number of budgeted operations.

                                                        Feet       Knee        Hip

Sales Per Operation	3000	4000	4400
Less Cost	2770	3290	3300
Profit	230	710	1100
Total Profit	2040
Profit Margin: Per £	0.0767	0.1775	0.2500
Profit Margin: %	7.6667	17.75	25.000

*See Details in Appendix

Net profit margin represents net profit to costs percentage. It is a good overall view of the activities.In identical industries, net profit margin can tell which company is performing better.(Bragg, 2018)

Proposed Option 2

The total direct costs of operations remain the same.  However, the indirect costs change dramatically.The director ordered to allocate indirect costs to total number of operations.

 

                                                        Feet          Knee          Hip

Sales Per Operation	3000	4000	4400
Less Cost Per Operation	2514.00	3374.48	3480.51
Profit	486	625.52	919.4872
Total Profit	2031.007179
Profit Margin: Per £	0.162	0.15638	0.2090
Profit Margin: %	16.2	15.638	20.897

*See Details in Appendix

As you can see the profit margin has increased for feet and knee but not hip. This looks like a better way of apportioning costs because the number of budgeted operations for knee and feet are more than hip.

Now, let us try to understand what is happening here. Current option apportions or gives indirect costs to each cost element based on budgeted operations.  Hip operation and feet operation are allocated less cost. Thus, in one case it is over absorbed but for the other two it is under absorbed.

That is why the net profit margin shows a remarkable fluctuation and it seems certainly that option 2 is better than current option.

Activity Based Costing

In this costing method, the organization looks at what drives the cost. Hence, the activity that drives cost must be connected with the relevant cost.(BPP Learnig Media, June 2009)………