The practice of overhead allocation in a hospital in Singapore with special emphasis on activity-based costing

As technology advances, administrative systems such as accounting should develop in tandem. Management accounting has often been criticized for not keeping in pace with these advances. Activity-Based Costing (ABC) , a contemporary concept that offers an alternative to conventional product costing techniques, is one recent development to answer the need. In view of the fact that much of the research on ABC pertains to a manufacturing context, this study seeks to examine the practice of ABC in the service industry, specifically in a healthcare environment. Further, increasing costs of health care services has invoked much concern from the public and thus, the efficient and fair pricing of health care services is of current interest. The research focus is a case study of XYZ Hospital which partially uses ABC, as a more in-depth and therefore richer analysis can be provided through this approach. It also includes an extensive literature review which gives an overview of traditional product costing in addition to the development and concepts of ABC, its associated benefits, limitations of use and applicability to service organizations. In the case analysis, the reasons for the adoption of and problems arising from the conventional and activity-based costing systems, and the possibility of extending the use of ABC are discussed. Although the case study provides only tentative conclusions, it revealed that ABC does improve overhead allocation and potential benefits may be reaped if adopted on a wider basis. However, the use of ABC may be inhibited by the difficulties involved in data collection and the lack of administrative staff support. Finally, due to the varied nature of providing health care services as products, the use of ABC in XYZ Hospital may not render the same level of benefits as for manufacturing firms.ACCOUNTANC