The Benefit of Using ABC Costing Over the Traditional Method of Costing

Document Type:Case Study

Subject Area:Accounting

Document 1

The areas that internet sources, textbooks and articles used are appropriately cited. All the resources are cited in the references. Signed Date MEMO To: From Date Subject: The Benefit of Using ABC Costing Over the Traditional Method of Costing GWS Medi-clinic as a growing medical clinic is facing different challenges especially in utilisation and allocation of resources. These issues have been challenged by different parties some putting blames on the clinic management. The best costing method has to be introduced in the system to solve the problem of costing in GWS Medi-clinic. GWS Medi-clinic being our case uses the patient days when calculating the cost. This method may, therefore, exaggerate the cost needed per month as the number of admissions and discharges of patients may vary from time to time.

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GWS Medi-clinic has the following overhead cost allocation using the traditional method of cost allocation. Activity Based Costing is one of the inventory management technique that uses on Pareto principles in the determination of the items that should be prioritised in the production process (Handanhal Ravinder, and Ram B. Misra pg 258). Category A refers to items that have highest dollar volume and are most demanded. On the other hand, category C are those items that have lowest Dollar volume and least demanded. The other category B, are categories that lie between the other two categories A & C (Handanhal Ravinder, and Ram B. Misra pg 259). The items under category A should be closely monitored during the service delivery because there value, demand is high.

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ABC costing principles assist managers in the allocation of inputs on bases of the factors mentioned above. The use of ABC costing in GWS Medi-clinic will bring a significant advantage in minimisation of both operation and managerial costing in comparison to the previous costing method that is currently being used. The significant advantage of ABC costing is that the method improves the business process. ABC costing method will account for all costs that are similar to the mode of production. Therefore, the method will allow GWS Medi-clinic management to understand the loopholes in overhead costs. Cost per client Meals R230. 23 Laundry R 50. 18 3139Basic nursing care R 1036. 04 Subtotal R 1316. 45 Overhead cost driven by patient days in the high care ward 834. No increment of 5% on prices to any group.

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Any issue noted during costing should be addressed to the management. MA group must not know the overcharge recorded in the previous years due to the cost implication. No refund of the overcharge should be given to the groups regarding money, but they can get compensation regarding price reduction. The same case will apply to the clients that were undercharged. The application of ABC costing ensures that the values calculated per patient are accurate. To minimize the complaints from the partners, the med clinic should maintain the pricing. The ABC costing will be relevant during the purchase of inputs. The classification of items needed to run the clinic will play a significant role. Purchase of category A items in bulk followed by the item B and then C will ensure that GWS clinic enjoys the economies of scale.

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The occupancy level of 85 % may not be achieved in the short run. GWS income depends primarily on the number of patients that visits the clinic. The number of patients recorded in the previous year’s cannot significantly support the expansion of the clinic facilities in the short run. Therefore it will take time for GWS Medi clinic to raise enough resources for expansion. The expansion of the services provided by Dr Soon, therefore, is a critical factor that will make the clinic more competitive. Competence being one of the ethical codes needs that every accountant to maintain the accounting level skills through adherence of accounting rules, laws and technical standards set. Any report that one prepares must me clear and complete.

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In addition, the report provided must have clear evidence and reliable sources in case another analysis is done. Therefore it would therefore be a risk to me as I hold all the liabilities to the management and other partners I deliver false information. Also, it is important to possess integrity in whatever one does. To facilitate the progress of a business, a check of inventory imbalances is necessary to reduce the dynamics of supply and demand of any commodity. ABC costing is one of the best systems that can easily monitor and control the allocation of costs on bases of demand, availability of supplies, durability among other factors discussed previously in this paper. References Handanhal Ravinder, and Ram B. Misra. "ABC Analysis For Inventory Management.

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