Question

1) Why is it essential that we understand and measure costs right? How does Measure Cost Right presribe we fix cost?

2) Does the U.S. healthcare system have a cost crisis? If so why? What can be done to help fix this problem?

Answer 1

Measure Cost Right prescribes to use activity based costing to fix cost. Activity-based costing is helpful in providing the management relatively accurate cost information about the product. Activity based costing (ABC) was developed to overcome the shortcomings of the traditional method. Instead of just one cost driver such as machine hours, Activity based costing will use multiple cost drivers to allocate a manufacturer's indirect costs. A few of the cost drivers that is used by ABC include the cost of material purchased or used, the number of machine setups involved, counting the number of engineering change orders, and the number of machine hours.

Advantages of ABC Costing:

--Helps in cutting costs by providing reliable information on the opportunities available for reducing costs

--Assists management in making quality decision by knowing the nature of each activity.

--Helps managers on focusing the forces on value adding activities and eliminating non-value adding activities

-- A proper cost allocation to various products leads to proper pricing policy

-- Assist managers to adopt productivity improvement approaches such as TQM, BPR etc

-- Identifies processes which are inefficient and target for improvements

-- Discovers the processes which have wasted and unnecessary costs