Harvard Case - Asante Teaching Hospital: Activity-Based Costing
"Asante Teaching Hospital: Activity-Based Costing" Harvard business case study is written by Melissa Jean, Courtney Young. It deals with the challenges in the field of Accounting. The case study is 6 page(s) long and it was first published on : Sep 14, 2016
At Fern Fort University, we recommend that Asante Teaching Hospital implement an Activity-Based Costing (ABC) system to improve its cost accounting, financial analysis, and decision-making processes. This will enable the hospital to gain a more accurate understanding of its costs, identify areas for improvement, and ultimately enhance its financial performance and patient care.
2. Background
Asante Teaching Hospital, a major healthcare provider in Ghana, faces challenges in accurately determining the cost of its services. The current cost accounting system, based on traditional allocation methods, fails to capture the complexities of the hospital's operations. This leads to distorted cost information, making it difficult for management to make informed decisions regarding pricing, resource allocation, and service improvements.
The case study highlights the following key protagonists:
- Dr. Kwame Addo: The hospital's Chief Medical Officer, concerned about the lack of accurate cost information and its impact on resource allocation and patient care.
- Mr. Kofi Mensah: The hospital's Chief Finance Officer, responsible for managing the hospital's finances and seeking ways to improve cost efficiency.
- The Hospital Board: Responsible for overseeing the hospital's operations and ensuring financial sustainability.
3. Analysis of the Case Study
This case study can be analyzed using the following framework:
Strategic Framework:
- Mission: To provide quality healthcare services to the Ghanaian population.
- Vision: To be the leading healthcare provider in Ghana, known for its excellence in patient care and financial sustainability.
- Competitive Advantage: Asante Teaching Hospital aims to achieve a competitive advantage through its commitment to quality care, its focus on research and innovation, and its strong community engagement.
Financial Framework:
- Financial Performance: The hospital is facing financial challenges due to rising costs and limited resources.
- Cost Accounting System: The current cost accounting system is outdated and does not accurately reflect the true costs of providing services.
- Profitability: The hospital struggles to achieve profitability due to inaccurate cost information and inefficient resource allocation.
Operational Framework:
- Service Delivery: The hospital provides a wide range of services, including inpatient care, outpatient care, and specialized services.
- Resource Allocation: The hospital faces challenges in allocating resources effectively due to limited information about the true cost of services.
- Efficiency: The hospital aims to improve efficiency and reduce costs while maintaining high quality patient care.
Management Framework:
- Decision-Making: The lack of accurate cost information hinders management's ability to make informed decisions about pricing, resource allocation, and service improvements.
- Performance Measurement: The hospital needs to develop better performance indicators to track its progress in achieving its strategic goals.
- Change Management: Implementing an ABC system will require significant change management efforts to ensure successful adoption and utilization.
4. Recommendations
To address the challenges faced by Asante Teaching Hospital, we recommend the following:
- Implement an Activity-Based Costing (ABC) System: This will provide a more accurate and detailed understanding of the hospital's costs by tracking activities and resources consumed in delivering services.
- Identify and Classify Cost Drivers: The hospital should identify the key activities driving costs and classify them into cost pools. This will enable accurate cost allocation based on actual resource consumption.
- Develop Cost Allocation Rules: The hospital needs to develop clear and transparent cost allocation rules based on the identified cost drivers. This will ensure fairness and consistency in cost allocation.
- Develop Performance Indicators: The hospital should develop performance indicators to track the effectiveness of the ABC system and monitor its impact on financial performance and service delivery.
- Train Staff and Implement Change Management: The hospital should provide comprehensive training to staff on the ABC system and implement a change management plan to ensure smooth adoption and utilization.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The ABC system aligns with the hospital's mission to provide quality healthcare services by enabling better resource allocation and decision-making.
- External customers and internal clients: The ABC system will improve the hospital's understanding of the costs associated with providing services, which can inform pricing strategies and enhance patient satisfaction.
- Competitors: Implementing an ABC system will help the hospital remain competitive by enabling better cost control and resource allocation.
- Attractiveness ' quantitative measures: The ABC system offers the potential for significant cost savings and improved financial performance, leading to increased profitability and sustainability.
- Assumptions: The success of the ABC system relies on the hospital's commitment to data accuracy, staff training, and ongoing monitoring and evaluation.
6. Conclusion
Implementing an Activity-Based Costing system at Asante Teaching Hospital will significantly improve the hospital's cost accounting, financial analysis, and decision-making processes. This will enable the hospital to gain a more accurate understanding of its costs, identify areas for improvement, and ultimately enhance its financial performance and patient care.
7. Discussion
Other alternatives not selected include:
- Continuing with the current cost accounting system: This would maintain the status quo but would continue to provide inaccurate cost information, hindering decision-making and financial performance.
- Implementing a hybrid cost accounting system: This would combine elements of the current system with aspects of ABC, but it might not provide the same level of accuracy and detail.
Risks and key assumptions:
- Data accuracy: The success of the ABC system relies on accurate data collection and analysis.
- Staff resistance to change: Implementing a new cost accounting system can encounter resistance from staff, requiring effective change management strategies.
- Cost of implementation: Implementing an ABC system can be costly, requiring investment in software, training, and staff time.
8. Next Steps
To implement the recommended changes, the following steps should be taken:
- Phase 1 (3 months): Conduct a feasibility study to assess the costs and benefits of implementing an ABC system.
- Phase 2 (6 months): Design and implement the ABC system, including identifying cost drivers, developing cost allocation rules, and training staff.
- Phase 3 (ongoing): Monitor and evaluate the performance of the ABC system, making adjustments as needed to ensure its effectiveness.
By taking these steps, Asante Teaching Hospital can improve its cost accounting, financial analysis, and decision-making processes, ultimately enhancing its financial performance and patient care.
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Case Description
In August 2015, an intern at Asante Teaching Hospital, a prestigious not-for-profit hospital in Johannesburg, South Africa, wanted to organize the cost data she had gathered from staff interviews into clear recommendations for the hospital's chief executive officer. Asante Teaching Hospital's maternity ward competitors had begun offering bundled pricing for natural births, and the intern wondered if Asante Teaching Hospital should do the same. In order to calculate the costs of the service, she planned to employ both activity-based and time-driven activity-based costing techniques. With this information, she could present the results of her analysis and recommendations for a pricing strategy.
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