USING ACTIVITY-BASED COSTING IN HEALTHCARE INDUSTRY- CASE STUDY
Majed and Faisal are friends and partners of an elite dentistry clinic called Wide Smile Dentistry Medical Centre in Muscat. The clinic is well-known for providing two services for clients: in-clinic treatment and home-visit treatment. The clinic has established itself well in the healthcare dentistry market due to the long experience of the main dentists working in the clinic and the good home-call services they provide. Some clients complained the cost might be too high for the services offered and started shifting to other clinics which copied the Wide Smile model of services. As part of the investigation to determine the contribution that each of these services make to the overall profit and to determine the ‘right’ prices and costs for services offered, Faisal is convinced that the allocation of overhead costs using the traditional way may be distorting the financial data used for pricing and cost decisions. Faisal learned in a recent MBA workshop about Activity Based Costing system (ABC) and its benefits. However, Majed argues that using a single cost object for cost allocation based on direct labor hours is simpler and is effective. Both partners finally agreed to settle this argument using last year data for analysis and comparison. The following table shows the overhead costs for the year ended December 31,2020 and the selected cost drivers as suggested by Faisal:
Activity Cost Pool
Cost Driver
Overhead Cost
Units of Cost Allocation Based
Total
In-Clinic Service
Home-Visit
Service
Drug Treatment
Treatments
R.O. 35,000
5,000 treatments
1,500
3,500
Surgery
Operations
R.O. 70,000
500 operations
400
100
Orthodontics
Treatments
R.O. 50,000
3,000 treatments
2,100
900
Consultation
Appointments/Calls
R.O. 12,000
2000 appointment /calls
1,200
1,800
Travel Cost
Kilometers
R.O.10,000
50,000 Km
5,000
45,000
Reception/Customer Care
Direct Labor Hours
R.O. 25,000
30,000 Hours
20,000
10,000
Rent
Square Feet Occupied
R.O. 8,000
1200 Square Feet
900
300
Other Overhead Costs*
Direct Labor Hours
R.O. 20,000
30,000 Hours
20,000
10,000
TOTAL
R.O. 230,000
Other Overhead Costs includes depreciation, advertising, insurance and utilities.
Faisal appointed your group to help with the decision whether to implement the ABC system in their healthcare company and asked you to prepare a report for him and his partner. Your assignment is to write a report that should include the following:
Applying ABC Systems to Wide Smile Dentistry Medical Centre: (13 marks)
State in details what steps should be taken to implement the ABC system for the clinic.
Apply the ABC system using the data provided by the clinic and compare results with the traditional system.
Draw your conclusion and feedback on the results and the cost drivers selected.
Describe how the change to ABC might be useful to Wide Smile and suggest ways for improvement.
In what cases it would not be useful to refine the traditional cost system into an ABC system?
identify the cost hierarchy for each of the costs listed.
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