Cost Control Policy and Management Accounting Essay

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Any entrepreneurial activity is aimed at making a profit, increasing capital. Nevertheless, to get surplus value, organizations first need to invest something, and it is precise with these investments that the possible efficiency of business activity is limited. That is, it can be said that the costs are the determining factor for making a profit. That is why a cost control policy is so important in healthcare organizations.

The objectives of cost and financial result control are to provide timely, objective, and sufficient analytical information about the organization’s cost structure for internal and external users and to develop the organization’s control environment. In addition, the policy provides increased opportunities for the development of balanced motivation of production and management personnel and increased opportunities for applying various approaches to analysis. Finally, the convergence of the principles of production accounting and cost control through integrated management also appears as a goal.

The Activity-based costing (ABC) method is widely used due to several advantages compared to traditional accounting methods, which imply that resources for all types of products are consumed in proportion to their output volumes. ABC in health care organizations has been suggested to be capable of addressing costing challenges (Keel et al., 2017). However, it has some drawbacks, and it is not a panacea for all accounting and reporting problems. American scientists Cooper and Kaplan developed the Activity-based costing method more than three decades ago, which was adopted in one department and at first and is now widely used (Berg & Madsen, 2020). The basic principle of calculating the cost is the division of costs into direct and indirect and the attribution of both types of costs to finished products. As a rule, there are no problems with the distribution of direct costs in practice since they can be directly attributed to the cost of a specific cost object.

The advantage of using ABC is to determine how the overhead is used more accurately. If the company considers the cost of production by this method, organizations can get more detailed information on compliance of business expenses with industry standards. McBain et al. (2018) point out that “health organizations need valid information on condition-specific costs and patient outcomes to make informed resource allocation decisions and cost–benefit trade-offs” (p. 16). The ABC method is an excellent feedback tool for measuring the current cost of specific services if the management is striving to reduce costs. It also gives an idea of all the costs associated with the internal work of the organization. Managers can see what costs can be reduced if they resort to outsourcing.

Cost management should be part of the overall enterprise management system. Making disparate management decisions and not following the cost control policy leads to the fact that the cost management system works inefficiently. In addition, the incompleteness and untimeliness of providing data on costs is the reason for the formation of erroneous indicators of the value of costs and cost, ignoring factors that affect the number of costs. High labor intensity and high costs for implementing ABC in the organization may cause the rejection of this policy.

These indicators are interrelated: as a rule, when minimizing the cost of implementation, the complexity of the process increases, and vice versa. In addition, certain time costs will be required: in large institutions, it may take about a year to implement the methodology; in small companies with relatively simple processes, the implementation can take much faster. However, non-compliance with this policy can lead to significant losses and inefficiency of work.

With increasing competition, organizations should be able to assess the profitability of the services offered realistically. The ABC system focuses attention and contributes to a better understanding of the factors that affect the costs of the budget and its management. Furthermore, the ABC system is related to all overhead costs, and therefore it takes managerial, financial accounting to a higher level, beyond the traditional boundaries of the production process. In addition, by controlling the distribution of cost carriers, healthcare organizations can also control the level of costs.

The ABC system can help in cost management as many costs are caused by interaction with customers; in classical cost accounting systems, this is not considered. For example, organizations may have trading relations with specific customers at a loss but do not know about it since the costs are not analyzed by a method that can assess the actual situation. The ABC system can be used together with the analysis of profitability by customers to determine with greater accuracy and reliability the amount of profit received from servicing certain groups of customers, thus improving the efficiency of patient care. Unintended consequences may be that the costs of implementing this accounting method may exceed the benefits received. In addition, sometimes the ABC system is introduced because it is fashionable and not because managers will use it to teach practical management information.

For an enterprise whose business process consists of many operations, the ABC method for calculating the cost is preferable. Its use will allow making more effective decisions in the field of marketing strategy, the profitability of services because it makes it possible to control expenses at the stage of their occurrence. This is why this method is one of the best ways to solve the problem of cost control. However, it is essential to create a reliable system at the enterprise that will allow getting the necessary information at a reasonable price. The current system should also be periodically reviewed and revised to decrease its usefulness over time.

References

Berg, T., & Madsen, D. Ø. (2020). Journal of Accounting & Organizational Change, 16(3), 401-425.

Keel, G., Savage, C., Rafiq, M., & Mazzocato, P. (2017).Health Policy, 121(7), 755-763.

McBain, R. K., Jerome, G., Leandre, F., Browning, M., Warsh, J., Shah, M., Mistry, B., Abnis I Faure, P., Pierre, C., Fang, A., Mugunga, J.C., Gottlieb, G., Rhatigan, J., & Kaplan, R. (2018). Bulletin of the World Health Organization, 96(1), 10-17.

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IvyPanda. 2022. "Cost Control Policy and Management Accounting." October 31, 2022. https://ivypanda.com/essays/cost-control-policy-and-management-accounting/.

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