Case context

In Australia, activity$-$based funding $($ABF$)$ is used to fund the healthcare system, where hospitals

receive payment based on the number and type of patients they treat. Hospitals are funded more if

they treat a higher volume of patients. ABF also adjusts for the complexity of cases, recognising that

some patients are more complicated to treat than others. Activity$-$based costing $($ABC$)$ is an essential

component of Activity$-$Based Funding $($ABF$).$ This costing method identifies the activities within an

organisation and allocates the costs of each activity to the products and$/$or services based on their

actual resource consumption.

Given the increasing costs of patient care in Westmead Hospital in Sydney, New South Wales,

Jenelle Perera $($General Manager of Westmead Hospital$)$ called for a strategy meeting. At the

meeting, she requested the current Director of Finance and Performance, Preet Matic, to carry out an

ABC study to determine the costs for different types of cardiology patients. The cardiology unit at

the Westmead Hospital is one of the busiest departments within the state hospital with high resource

usage.

The current costing system treats all cardiology patients as requiring the same type of patient care,

allocating costs based on a single cost driver $$ number of patient days. However, the management

and accounting teams know that some patients with complicated cardiac surgeries require more

intensive care than patients who require basic$/$normal care. Thus, there is a belief within the hospital

that the current costing system does not provide an accurate indication of resources consumed by

different types of cardiology patients.

After the meeting, Preet began work on designing an activity$-$based costing system for Westmead

Cardiology Unit $($hereafter WCU$).$ Based on her analysis of the annual figures from the previous year

in the general ledger, she first identified five main cost categories $($see Table $1).$ She then recalled,

from her accounting studies at UTS, that there were six main steps in implementing an ABC system:

$1.$ Identify the relevant cost object

$2.$ Identify activities

$3.$ Assign costs to activity$-$based cost pools

$4.$ For each ABC cost pool, choose a cost driver

$5.$ For each ABC cost pool, calculate a cost driver rate

$6.$ For each ABC cost pool, allocated activity costs to the cost objects

She decided to split the $6$ steps into two stages. Stage $1$ would include identifying and classifying

activities and then determining the cost of each activity $($Steps $1$ to $3).$ Stage $2$ would require the

identification of activity drivers, an activity rate for each activity and finally calculating and

allocating the consumption of activities by cost objects $($Step $4$ to $6).$

To accomplish Stage $1,$ Preet conducted an interview with the WCU nursing manager, David Lam.

The interview transcript is provided in Appendix $1.$ After the interview, Preet extracted key

information she required for the ABC system from the hospital$$s Management Accounting System

$($MAS$)$ and placed them into Table $2,$ which provides information about the previous year$$s nursing

hours used by each of the four activity centres identified during the interview. She also gathered

information about the total annual estimates of the activity cost drivers and the three different patient

types that she hoped she could use for WCU$$s ABC system $($see Table $3).$Table $2$

Table $31.$ WCU$$s ABC design: Complete Stage $1$ and Stage $2$ of the ABC system implementation, clearly identifying what the costs of each activity is $($Step $3),$ cost driver for each activity, with justification for the cost driver selected $($Step $4),$ cost driver rate for each activity $($Step $5)$ and total costs allocated to each patient type within WCU $($Step $6).$ Show all calculations and round up to $2$ decimal places, where applicable.

$2.$ Patient costing: What would the cost per patient$-$day be for each patient type within WCU if Westmead Hospital adopted ABC system? Conduct a comparison analysis of the current costing system costs and the ABC system costs, providing insights to patient costing within WCU. Show all calculations and round up to $2$ decimal places, where applicable.

$3.$ Costing system design recommendation: How could WCU$$s ABC system design be further improved? Explain why this improvement in the cost system design would lead to more accurate costs and how this could improve management decision$-$making at the hospital.

$4.$ ABC implementation: What factors should Westmead Hospital consider when weighing up whether to implement an ABC system $($or not$)$ to estimate the costs of servicing patients? Be specific in relating the benefits, costs and limitations of ABC to the particular features of adopting ABC within the context of a hospital.

$5.$ Strategic analysis: Based on your analysis, advice Westmead Hospital how its managers can use the ABC information to improve the hospital$$s operations?