ABC COST ANALYSIS/INSTALLATION OF A PLAN IN A NURSING HOME GROUP Harvard Case Solution & Analysis

ABC COST ANALYSIS/INSTALLATION OF A PLAN IN A NURSING HOME GROUP Case Solution

Introduction

The desire of most of the organizations in order to understand the behavior of their costs and the drivers of these costs has been growing rapidly over the past several years. However, there has been a great confusion within this organization on understanding the different types of the costs in different organizations and how to differentiate between the different types of the competing cost measurement technologies such as throughput accounting, standard costing or activity based costing. As a result, most of the managers are confused regarding which are the correct costs and what are the true drivers of these relative costs.
Therefore, in order to remain competitive in the business world, organizations today need to understand and be able to analyze the complete cost information of their organizations. Most of the organizations have been using traditional costing systems however, these costing systems resulted in lack of visibility of the indirect costs and as a result most of the organizations today have started to adopt activity based costing system(Stiles & Micks, 1997).
This costing system is based on a cost modeling which accounts for the direct as well as the indirect costs of all the services, customers, products and the channels of the organization through which the costs are incurred. This essay formulated an installation plan for implementing ABC system and ABC cost analysis within a nursing home (XYZ nursing home) in Ireland with five different business units around the country and annual turnover of about $ 10.5 million. This essay highlights the challenges these types of organizations face in determining their relevant cost drivers and develops an implementation plan for ABC system in the nursing homes (Miller, 1993).

Importance of ABC System in XYZ Nursing Home

Spending on the health care and the care of the elderly through the nursing homes in Ireland has been under increased scrutiny. There has been a constant pressure from the government of the country to manage the costs of these nursing homes especially in the time of the fiscal restraint. Funding for the health care now accounts for the total of one third of the provincial expenditures and a significant portion of this funding is allocated to the funding of the nursing homes in Ireland. The government of Ireland has been taking all the steps to control the costs of the health care. Moreover, organizations have also initiated internal cost measures (Shuneman, 1997).
The literature suggests that the management of the internal cost measures comes from the management of the cost drivers of these nursing homes and other health care organizations (Asadi & Batz, 1996). These cost drivers are the actual factors, which are thought to be the actual drivers of the cost and they also have a strong relationship with the actual costs of the organization.If we assess the costs within a nursing home, then the assessment of the costs would be linked with the resource requirements, care activities undertaken for the elderly and the resident care planning.
Currently, the financial managers and the cost accountants of XYZ nursing home have no ability to assess which of the care activities of the organization account for the costs of the organization.Therefore, in order to improve the effectiveness of care within the organization, all the costs of the care activities must be accessed through the relative activities where these costs are incurred.Thus, these types of care costs could only be understood by the implementation of a plan based on ABC system. This approach would help the cost accountants of the organization to define the costs in terms of the activities or the processes of the organization (Charles & Schalm, 1992)..............

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