Costing techniques in health care organizations

Running head: Accounting
Costing techniques in health care organizations
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Costing techniques in health care organizations
Improving financial management is a factor that is currently challenging several health care organizations. Therefore, most are trying to implement different forms of product costing techniques to reduce costs within the organization. According to CIMA Discussion Paper (2005), target costing is the most common type of costing technique. A target cost is described as a product cost estimate achieved by subtracting desired profit margin from a competitive market price. Target costing increased due to the fact that it considers the entire life circle of production. Moreover, it reduces the overall costs of production, R&D, engineering, accounting and marketing. Studies have revealed that target costing is mostly used as a management process and not cost control since it focuses on all aspects of the customer from the initial design process.
Second, Standard Unit Costing is where an organization costs the service, product or process that has been provided to the client. To calculate the unit cost of a product, each and every cost is broken down as much as possible into its component type. Afterwards, modern accounting packages with access to Data Warehousing can be applied and data will be analyzed according to diverse dimensions such as time, patient, service and cost center (Finkler, Ward & Baker, 2007). The ability to “slice and dice” implies that the management can see the whole picture of cost and identify any problems. Moreover, the problems can be corrected by comparing the costs to budgeted costs and identifying the costs variance.
Ratio of cost to charges (RCC) and relative value units (RVU) are other methodologies of costing used by health care organizations. In RCC, costs are divided into five separate parts: direct labor, direct supplies, overhead capital, overhead labor and overhead supplies (Courtney, Briggs & Briggs, 2004). The first two components analyze direct costs while the rest analyze indirect c...