Question

Case 1 :

Standard costing in healthcare

Meditech South Africa (Pty) Ltd provides software solutions to meet the information needs of healthcare organizations in Africa and the Middle East. According to their website, the software can encompass all areas of healthcare from doctor’s offices to hospitals. While their software products are generally patient centric, healthcare cost management also features in some of their products.

For example, the software designed for hospitals includes some functionality for finance managers on cost accounting. The functions include budgets and standard cost definition. Costs can be defined for labor, materials and overhead and can draw cost information from other Meditech software modules. With standard costs defined, actual costs can be compared to standard/ budget. Standard costs can also be used as a basis to reimburse costs from health insurers, or actual costs of providing the services can be compared to reimbursement levels.

The software also includes several reports such as variance reports by department, labor cost variances and flexible budget reports – all of which are useful for budgetary control and future budget preparation. Integration with other Meditech software modules and other systems implies cost data can be calculated at a departmental, procedure or patient level. For example, the cost accounting module can integrate with payroll systems ‘report on labor variance using labor productive hours and dollars.

Questions: (5 + 5 = 10 Marks)

a. Do you think standards can be applied to procedures in hospitals? Example how it can be applied. ((300 words))

b. Do you think standard cost variance reports are useful in healthcare? Justify your answer with suitable example. ((300 words))

Answer 1

a)

Standard Costing

Standard costing is a costing technique wherein the difference between (variance) the actual cost of producing a product and the expected cost that should have incurred is found for control and planning purposes for the future periods.

Steps involved in standard costing:

1. Determination of cost center
2. Classification of accounts
3. Setting standards and establishing standard cost
4. Determination of actual cost
5. Finding the variance of standard and actual cost
6. Finding the causes for the variance
7. Actions according to the results

Standard Costing in Hospital Sector

The provision of healthcare services are very complex and the services provided to each patient are subjective in nature. This contradicts the method of standard costing. But it can be used effectively where bundle payment schemes can be introduced. For an example, if a patients who gets treated for a an illness, say heart surgery, undergoes a course of treatments or services which are common to patients of similar category. This can be concised to a single payment scheme where the costs can be standradised. This can help the hospitals to have a better analysis of their costs and quality of services which can be improved further if required. It should be noted that those services that are purely subjective and cannot be used for the scheme should be completely excluded from the bundled payment scheme.

It is obvious that standard costing cannot be used for all the activities at a hospital but it can be brought to use where services are similar to all patients of a particular category

b)

Standard Cost Variance

Standard cost variance is the difference between standard cost and actual cost. Variance is used to analyse the causes of material deviations from the standard cost.

Variaces in hospital sector

Standard cost variances are useful in hospital activities which are standardised. It is of limited value where the services provided to each patient are subjective in nature. It can also be used for monitoring the costs incurred for the drugs and other materials required, where management efficiency are analysed. It cannot be used where the situations are highly fluctuating and negotiations are not possible.