In the rapidly evolving landscape of healthcare, the integration of Health IT systems has become a cornerstone for enhancing patient care, streamlining operations, and ensuring compliance with regulatory standards. Among the myriad components that contribute to the efficiency of these systems, vendor management stands out as a critical factor, especially in the realm of medical coding. Effective vendor management is not merely an operational necessity; it is a strategic imperative that can significantly impact the overall performance and reliability of health IT solutions.
Medical coding, being a highly specialized function within healthcare operations, requires precision and accuracy to ensure that patient records are meticulously maintained and that billing processes are executed without error. The complexity inherent in medical coding necessitates collaboration with external vendors who provide specialized software solutions and support services. These vendors play a pivotal role in aiding healthcare providers to keep pace with updates to coding standards such as ICD-10 or CPT codes, which are essential for accurate documentation and billing.
The importance of effective vendor management in this context cannot be overstated. Outsourcing staffing needs ensures that organizations maintain focus on patient care source medical staffing National Health Service. First and foremost, it facilitates seamless communication between healthcare providers and their vendors. This open line of communication is crucial for quickly addressing any issues that arise, whether they pertain to software bugs or changes in regulatory requirements. Moreover, effective communication ensures that vendors remain aligned with the strategic goals of the healthcare organization.
Furthermore, effective vendor management involves rigorous performance monitoring and evaluation. Healthcare organizations must establish clear metrics for assessing vendor performance to ensure they meet agreed-upon service levels consistently. Regular assessments help identify areas where vendors excel and where improvements are needed. By maintaining high standards for vendor performance, healthcare providers can mitigate risks associated with inaccuracies in medical coding which could lead to financial losses or compliance issues.
Another key aspect is fostering strong partnerships based on mutual trust and collaboration. When vendors are treated as partners rather than mere service providers, they are more likely to invest time and resources into understanding the unique needs of the healthcare organization. This collaborative approach enables both parties to innovate together, creating more robust solutions tailored specifically to address emerging challenges in medical coding.
Moreover, effective vendor management includes proactive risk assessment and contingency planning. Given the critical nature of medical coding systems within health IT infrastructures, any disruption can have far-reaching consequences on patient care delivery and organizational finances. By identifying potential risks early on-such as data breaches or system downtimes-and preparing appropriate responses ahead of time through well-crafted contracts or service level agreements (SLAs), organizations can safeguard themselves against unforeseen disruptions.
In conclusion, as health IT systems continue their transformative journey within modern medicine landscapes globally; effective vendor management emerges not just as an operational task but also serves strategically towards achieving excellence across various facets including cost control efficiency enhancement quality assurance among others especially when it comes handling intricate processes like Medical Coding which forms backbone revenue cycle management framework thus making sure every stakeholder involved benefits from long-lasting productive relationship built upon mutual respect trust shared objectives ultimately leading towards betterment patients' outcomes overall organizational success alike!
In the rapidly evolving landscape of health information technology (Health IT), vendor management has emerged as a critical component in ensuring the seamless delivery of medical coding solutions. As healthcare organizations increasingly rely on third-party vendors to handle complex coding tasks, they face a myriad of challenges that can impact both operational efficiency and patient care. Understanding these key challenges is essential for healthcare leaders seeking to optimize their vendor relationships and maintain high standards of service.
One of the primary challenges in managing vendors for medical coding solutions is maintaining data security and compliance. Health IT systems manage vast amounts of sensitive patient data, making them prime targets for cyberattacks. Ensuring that vendors comply with regulations such as HIPAA (Health Insurance Portability and Accountability Act) is crucial. Organizations must implement stringent security protocols and conduct regular audits to verify that vendors adhere to these standards. Failure to do so can result in severe legal repercussions and erode patient trust.
Another significant challenge is ensuring the accuracy and quality of coding services provided by vendors. Medical coding is a specialized field that requires precise knowledge and attention to detail. Inaccurate coding can lead to billing errors, delays in reimbursement, and even compromise patient safety if incorrect information affects treatment decisions. Healthcare organizations must establish clear quality benchmarks and regularly monitor vendor performance through audits and feedback mechanisms to ensure high-quality outputs.
Communication barriers also pose substantial challenges in vendor management within Health IT systems. The complexity of medical coding solutions often necessitates close collaboration between healthcare providers and vendors. However, differences in language, time zones, or even organizational culture can hinder effective communication, leading to misunderstandings or misaligned objectives. Establishing robust communication channels, including regular meetings and updates, can help bridge these gaps and foster a more collaborative working relationship.
Additionally, managing costs while retaining value from vendor partnerships remains a persistent challenge. While outsourcing medical coding services may initially appear cost-effective, hidden costs or unexpected fees can quickly escalate expenses beyond budgeted limits. Healthcare organizations need to negotiate transparent contracts with clearly defined deliverables and pricing structures to avoid financial pitfalls.
Finally, integrating third-party solutions into existing Health IT infrastructure presents another layer of complexity in vendor management. Compatibility issues between systems can result in disruptions or inefficiencies if not adequately addressed during the implementation phase. Collaborative planning sessions between internal IT teams and vendors are essential for ensuring smooth integration without compromising system functionality.
In conclusion, effectively managing vendors for medical coding solutions entails navigating a complex landscape filled with potential pitfalls related to data security, quality assurance, communication barriers, cost management, and system integration challenges. By proactively addressing these issues through strategic planning coupled with strong oversight mechanisms-healthcare organizations can cultivate successful partnerships that enhance operational efficiency while safeguarding patient care standards amidst an increasingly digitized world.
Selecting the right medical coding vendors is a critical component of vendor management for Health IT systems. As healthcare organizations increasingly rely on external partners to handle complex tasks like medical coding, choosing the right vendor can significantly impact operational efficiency, compliance, and financial performance. The process involves evaluating various criteria to ensure that the selected vendor aligns with the organization's goals and standards.
One of the primary criteria in selecting a medical coding vendor is expertise and experience. A vendor with a proven track record in handling diverse healthcare specialties and an understanding of regulatory requirements, such as ICD-10 and CPT codes, is essential. Experienced vendors are more likely to provide accurate and efficient coding services, which can help reduce claim denials and optimize revenue cycles.
Another crucial factor is technological capability. In today's digital landscape, it is imperative for medical coding vendors to leverage advanced technologies like AI-powered tools and electronic health records (EHR) integration. These technologies enhance accuracy, streamline processes, and ensure real-time updates-benefits that are indispensable in fast-paced healthcare environments. Vendors with robust technological capabilities can provide insights into data analytics that aid strategic decision-making for healthcare providers.
Compliance with industry standards and regulations also plays a pivotal role in vendor selection. Healthcare organizations must ensure that their chosen vendors adhere strictly to HIPAA regulations to protect patient information's confidentiality and integrity. Vendors should have comprehensive compliance programs in place, including routine audits and staff training on security protocols.
Cost-effectiveness cannot be overlooked when selecting a medical coding vendor. Organizations should evaluate whether the pricing structure offered by a potential vendor delivers value without compromising quality or service levels. Transparent pricing models help avoid unexpected costs and facilitate better budget management.
Additionally, customer support and communication are key aspects that determine the success of any outsourcing relationship. A reliable vendor should offer responsive support channels to address queries or issues promptly. Effective communication fosters collaboration between healthcare providers and vendors, ensuring alignment on objectives and swift resolution of challenges.
Lastly, scalability is an essential criterion to consider as healthcare needs evolve over time. A good medical coding vendor should be able to scale its services up or down according to changing demands without compromising quality or turnaround times.
In conclusion, selecting the right medical coding vendors requires careful consideration of multiple factors including expertise, technology use, compliance adherence, cost-effectiveness, customer support quality, and scalability potential. By prioritizing these criteria during the selection process, healthcare organizations can establish fruitful partnerships that enhance their operational efficiencies while maintaining high standards of care delivery.
In the rapidly evolving world of Health IT systems, effective vendor management is crucial for ensuring seamless operations and quality service delivery. One key area that demands strategic attention is building strong relationships with medical coding vendors. These relationships can significantly impact the accuracy, efficiency, and compliance aspects of healthcare services. Here are a few strategies that can help foster these essential partnerships.
Firstly, clear communication forms the cornerstone of any robust relationship. Establishing open lines of dialogue with your medical coding vendors ensures that expectations are understood and met on both sides. Regular meetings and updates provide an opportunity to discuss any challenges or changes in requirements, helping both parties stay aligned with project goals. Providing detailed guidelines regarding coding standards and expectations also eliminates ambiguity, leading to improved accuracy and efficiency in service delivery.
Secondly, trust plays a pivotal role in strengthening vendor relationships. Trust can be cultivated by demonstrating commitment to a partnership approach rather than a transactional one. This involves not just monitoring performance but also recognizing achievements and contributions made by the vendors towards achieving shared objectives. Acknowledging their expertise fosters mutual respect and encourages a cooperative spirit.
Another important strategy is collaboration through joint problem-solving initiatives. By involving vendors in brainstorming sessions or seeking their input on process improvements, organizations can tap into their specialized knowledge while promoting a sense of ownership among vendor teams. This collaborative approach often results in innovative solutions that benefit both parties.
Furthermore, investing in training and development programs for vendor staff can pay dividends in terms of quality enhancement. Offering access to resources such as workshops or certifications helps ensure that vendor personnel remain at the forefront of industry developments and best practices. This investment demonstrates a commitment to long-term partnership growth rather than short-term gains.
Performance metrics should also be used judiciously to guide continuous improvement without breeding resentment or undue pressure. Setting realistic benchmarks based on mutual agreement enables vendors to strive for excellence while feeling supported rather than scrutinized.
Lastly, fostering transparency around contractual terms and conditions builds credibility between partners. Clearly defining roles, responsibilities, timelines, penalties for non-compliance, as well as rewards for exceptional performance leaves little room for misunderstandings or disputes later on.
In conclusion, building strong relationships with medical coding vendors requires more than just business transactions; it necessitates nurturing partnerships through effective communication practices coupled with trust-building measures like collaboration opportunities alongside transparent contracts backed by continual learning investments supported via fair performance evaluation systems-all aimed at achieving holistic success within today's complex health IT landscape!
Ensuring compliance and security with medical coding vendors is a crucial component of effective vendor management for health IT systems. As healthcare organizations increasingly rely on third-party vendors to handle sensitive patient information, the need to establish robust protocols for compliance and security becomes paramount. This necessity is driven by the dual imperatives of safeguarding patient data and adhering to stringent regulatory requirements.
Medical coding vendors play an instrumental role in the healthcare ecosystem by translating patient information into standardized codes used for billing, research, and record keeping. Given their access to vast amounts of sensitive health data, these vendors must be managed carefully to prevent breaches that could compromise patient confidentiality and lead to significant legal repercussions.
The first step in ensuring compliance is a thorough vetting process when selecting a vendor. Healthcare organizations must evaluate potential partners based on their ability to meet relevant regulations such as the Health Insurance Portability and Accountability Act (HIPAA) in the United States or similar frameworks in other countries. This involves assessing the vendor's policies, procedures, and technology infrastructure to ensure they have robust measures in place to protect patient data.
Once a vendor has been chosen, continuous monitoring becomes essential. Regular audits should be conducted to verify that the vendor adheres to established compliance standards. These audits help identify any weaknesses or gaps in security practices that need addressing. Furthermore, organizations should require vendors to provide regular updates on any changes in their processes or technologies that could impact data security.
In addition to auditing, fostering open communication channels between the healthcare organization and its vendors is vital. Establishing clear expectations through comprehensive service level agreements (SLAs) ensures both parties understand their roles and responsibilities concerning data protection. SLAs should outline specific security measures the vendor must maintain, along with penalties for non-compliance.
Training also plays an integral role in maintaining compliance and security standards. Both internal staff members who interact with vendor systems and external vendor employees should receive regular training on best practices for data protection and emerging threats within the cybersecurity landscape. This helps create a culture of vigilance where everyone understands their part in safeguarding sensitive information.
Finally, implementing advanced technological solutions can bolster efforts to protect patient data when working with medical coding vendors. Encryption technologies, secure access controls, and real-time monitoring tools are just some examples of how technology can provide additional layers of defense against unauthorized access or breaches.
In conclusion, managing medical coding vendors effectively requires a multi-faceted approach focused on ensuring compliance and securing patient data at every stage of interaction with external partners. By rigorously vetting potential vendors, conducting regular audits, maintaining open communication lines through well-defined SLAs, investing in ongoing training initiatives, and leveraging advanced technological safeguards, healthcare organizations can mitigate risks associated with third-party partnerships while upholding their commitment to patient privacy and regulatory adherence.
In the rapidly evolving landscape of healthcare, Health IT systems have become indispensable tools for managing patient information, streamlining workflows, and enhancing the quality of care. Central to these systems is the process of medical coding, which translates complex medical diagnoses and procedures into standardized codes. This critical function is often outsourced to specialized vendors. However, ensuring that these vendors deliver high-quality services requires a robust framework for performance monitoring and evaluation.
Performance monitoring and evaluation of medical coding vendors are vital components of effective vendor management in Health IT systems. As healthcare organizations strive to maintain compliance with regulations such as HIPAA and ICD-10, accurate coding becomes paramount. Incorrect or inconsistent coding can lead to billing errors, claim denials, and potential legal repercussions. Therefore, healthcare providers must implement systematic approaches to evaluate vendor performance continually.
The first step in this process involves establishing clear expectations and benchmarks for vendor performance. These should be outlined in detailed service level agreements (SLAs) that specify accuracy rates, turnaround times, data security measures, and other key performance indicators (KPIs). By setting these standards upfront, healthcare organizations create a baseline against which vendor performance can be measured objectively.
Regular audits are another essential component of the evaluation process. These audits should review a representative sample of coded records to assess accuracy and consistency with established guidelines. Additionally, audits serve as an opportunity to identify patterns or trends that may indicate underlying issues in the coding process. By conducting these evaluations regularly-whether quarterly or annually-healthcare providers ensure ongoing compliance with industry standards.
Technology plays a crucial role in facilitating effective performance monitoring. Advanced analytics tools can automate the tracking of KPIs and provide real-time insights into vendor performance. Dashboards displaying metrics such as error rates or processing speeds enable healthcare managers to make informed decisions quickly and efficiently. Moreover, integrating artificial intelligence into these systems can help predict potential risks before they escalate into significant problems.
Collaboration between healthcare providers and vendors is vital for successful performance monitoring and evaluation. Open communication channels allow for timely feedback on areas where improvements are necessary while fostering a culture of continuous improvement. Regular meetings between both parties encourage discussions on best practices or innovations that could enhance service delivery further.
Finally, it is essential not only to focus on identifying shortcomings but also on recognizing exemplary performance by vendors who consistently meet or exceed expectations set forth in SLAs or KPI targets achieved during regular reviews undertaken by management teams responsible within respective organizations overseeing said contracts involved therein accordingly without prejudice whatsoever thereby ensuring mutual respect exists at all times amongst those engaged professionally therein throughout duration thereof irrespective any unforeseen circumstances arising unexpectedly requiring immediate attention without delay whenever possible under prevailing conditions encountered situationally speaking overall objectively viewed holistically considered pragmatically approached systematically analyzed thoroughly evaluated comprehensively documented properly archived securely maintained indefinitely retained until deemed unnecessary otherwise disposed appropriately according applicable policies procedures governing same universally accepted globally acknowledged internationally recognized standard operating protocols adhered strictly followed rigorously enforced mandatorily complied uniformly observed diligently monitored closely supervised attentively managed effectively controlled efficiently executed successfully implemented satisfactorily concluded favorably resolved amicably settled equitably adjusted fairly compensated adequately rewarded justly deserved duly appreciated genuinely valued sincerely respected honorably upheld nobly cherished proudly celebrated meaningfully enjoyed fully relished positively embraced wholeheartedly accepted graciously welcomed enthusiastically supported unconditionally endorsed wholeheartedly promoted actively encouraged widely advocated passionately championed vigorously defended strongly protected staunchly preserved firmly safeguarded steadfastly maintained resolutely sustained unwavering commitment demonstrated unequivocally proven undeniably evident irrefutably established conclusively verified substantively validated credibly authenticated reliably confirmed authoritatively witnessed publicly att
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Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business.[1] This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.
Financial accountancy is governed by both local and international accounting standards. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules that accountants follow in recording and summarizing and in the preparation of financial statements.
On the other hand, International Financial Reporting Standards (IFRS) is a set of accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board (IASB).[2] With IFRS becoming more widespread on the international scene, consistency in financial reporting has become more prevalent between global organizations.
While financial accounting is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company, managerial accounting provides accounting information to help managers make decisions to manage the business.
Financial accounting and financial reporting are often used as synonyms.
1. According to International Financial Reporting Standards: the objective of financial reporting is:
To provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the reporting entity.[3]
2. According to the European Accounting Association:
Capital maintenance is a competing objective of financial reporting.[4]
Financial accounting is the preparation of financial statements that can be consumed by the public and the relevant stakeholders. Financial information would be useful to users if such qualitative characteristics are present. When producing financial statements, the following must comply: Fundamental Qualitative Characteristics:
Enhancing Qualitative Characteristics:
The statement of cash flows considers the inputs and outputs in concrete cash within a stated period. The general template of a cash flow statement is as follows: Cash Inflow - Cash Outflow + Opening Balance = Closing Balance
Example 1: in the beginning of September, Ellen started out with $5 in her bank account. During that same month, Ellen borrowed $20 from Tom. At the end of the month, Ellen bought a pair of shoes for $7. Ellen's cash flow statement for the month of September looks like this:
Example 2: in the beginning of June, WikiTables, a company that buys and resells tables, sold 2 tables. They'd originally bought the tables for $25 each, and sold them at a price of $50 per table. The first table was paid out in cash however the second one was bought in credit terms. WikiTables' cash flow statement for the month of June looks like this:
Important: the cash flow statement only considers the exchange of actual cash, and ignores what the person in question owes or is owed.
The statement of profit or income statement represents the changes in value of a company's accounts over a set period (most commonly one fiscal year), and may compare the changes to changes in the same accounts over the previous period. All changes are summarized on the "bottom line" as net income, often reported as "net loss" when income is less than zero.
The net profit or loss is determined by:
Sales (revenue)
– selling, general, administrative expenses (SGA)
– depreciation/ amortization
= earnings before interest and taxes (EBIT)
– interest and tax expenses
= profit/loss
The balance sheet is the financial statement showing a firm's assets, liabilities and equity (capital) at a set point in time, usually the end of the fiscal year reported on the accompanying income statement. The total assets always equal the total combined liabilities and equity. This statement best demonstrates the basic accounting equation:
Assets = Liabilities + Equity
The statement can be used to help show the financial position of a company because liability accounts are external claims on the firm's assets while equity accounts are internal claims on the firm's assets.
Accounting standards often set out a general format that companies are expected to follow when presenting their balance sheets. International Financial Reporting Standards (IFRS) normally require that companies report current assets and liabilities separately from non-current amounts.[5][6] A GAAP-compliant balance sheet must list assets and liabilities based on decreasing liquidity, from most liquid to least liquid. As a result, current assets/liabilities are listed first followed by non-current assets/liabilities. However, an IFRS-compliant balance sheet must list assets/liabilities based on increasing liquidity, from least liquid to most liquid. As a result, non-current assets/liabilities are listed first followed by current assets/liabilities.[7]
Current assets are the most liquid assets of a firm, which are expected to be realized within a 12-month period. Current assets include:
Non-current assets include fixed or long-term assets and intangible assets:
Liabilities include:
Owner's equity, sometimes referred to as net assets, is represented differently depending on the type of business ownership. Business ownership can be in the form of a sole proprietorship, partnership, or a corporation. For a corporation, the owner's equity portion usually shows common stock, and retained earnings (earnings kept in the company). Retained earnings come from the retained earnings statement, prepared prior to the balance sheet.[8]
This statement is additional to the three main statements described above. It shows how the distribution of income and transfer of dividends affects the wealth of shareholders in the company. The concept of retained earnings means profits of previous years that are accumulated till current period. Basic proforma for this statement is as follows:
Retained earnings at the beginning of period
+ Net Income for the period
- Dividends
= Retained earnings at the end of period.[9]
One of the basic principles in accounting is "The Measuring Unit principle":
The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements."[10]
Historical Cost Accounting, i.e., financial capital maintenance in nominal monetary units, is based on the stable measuring unit assumption under which accountants simply assume that money, the monetary unit of measure, is perfectly stable in real value for the purpose of measuring (1) monetary items not inflation-indexed daily in terms of the Daily CPI and (2) constant real value non-monetary items not updated daily in terms of the Daily CPI during low and high inflation and deflation.
The stable monetary unit assumption is not applied during hyperinflation. IFRS requires entities to implement capital maintenance in units of constant purchasing power in terms of IAS 29 Financial Reporting in Hyperinflationary Economies.
Financial accountants produce financial statements based on the accounting standards in a given jurisdiction. These standards may be the Generally Accepted Accounting Principles of a respective country, which are typically issued by a national standard setter, or International Financial Reporting Standards (IFRS), which are issued by the International Accounting Standards Board (IASB).
Financial accounting serves the following purposes:
The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting.
The trial balance, which is usually prepared using the double-entry accounting system, forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. Accounting standards determine the format for these accounts (SSAP, FRS, IFRS). Financial statements display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders' or owners' equity of the company on the date to which the accounts were prepared.
Asset, expense, and dividend accounts have normal debit balances (i.e., debiting these types of accounts increases them).
Liability, revenue, and equity accounts have normal credit balances (i.e., crediting these types of accounts increases them).
0 = Dr Assets Cr Owners' Equity Cr Liabilities . _____________________________/\____________________________ . . / Cr Retained Earnings (profit) Cr Common Stock \ . . _________________/\_______________________________ . . . / Dr Expenses Cr Beginning Retained Earnings \ . . . Dr Dividends Cr Revenue . . \________________________/ \______________________________________________________/ increased by debits increased by credits Crediting a credit Thus -------------------------> account increases its absolute value (balance) Debiting a debit Debiting a credit Thus -------------------------> account decreases its absolute value (balance) Crediting a debit
When the same thing is done to an account as its normal balance it increases; when the opposite is done, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when there is one positive and one negative (opposites) that you will subtract.
However, there are instances of accounts, known as contra-accounts, which have a normal balance opposite that listed above. Examples include:
Many professional accountancy qualifications cover the field of financial accountancy, including Certified Public Accountant CPA, Chartered Accountant (CA or other national designations, American Institute of Certified Public Accountants AICPA and Chartered Certified Accountant (ACCA).
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Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more indirect costs (overhead) into direct costs compared to conventional costing.
The UK's Chartered Institute of Management Accountants (CIMA), defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.[1]
The Institute of Cost Accountants of India says, ABC systems calculate the costs of individual activities and assign costs to cost objects such as products and services on the basis of the activities undertaken to produce each product or services. It accurately identifies sources of profit and loss.[2]
The Institute of Cost & Management Accountants of Bangladesh (ICMAB) defines activity-based costing as an accounting method which identifies the activities which a firm performs and then assigns indirect costs to cost objects.[3]
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With ABC, a company can soundly estimate the cost elements of entire products, activities and services, that may help inform a company's decision to either:
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
Following strong initial uptake, ABC lost ground in the 1990s compared to alternative metrics, such as Kaplan's balanced scorecard and economic value added. An independent 2008 report concluded that manually driven ABC was an inefficient use of resources: it was expensive and difficult to implement for small gains, and a poor value, and that alternative methods should be used.[4] Other reports show the broad band covered with the ABC methodology.[5]
However, application of an activity based recording may be applied as an addition to activity based accounting, not as a replacement of any costing model, but to transform concurrent process accounting into a more authentic approach.
Traditionally, cost accountants had arbitrarily added a broad percentage of analysis into the indirect cost. In addition, activities include actions that are performed both by people and machine.
However, as the percentages of indirect or overhead costs rose, this technique became increasingly inaccurate, because indirect costs were not caused equally by all products. For example, one product might take more time in one expensive machine than another product—but since the amount of direct labor and materials might be the same, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.
ABC is based on George Staubus' Activity Costing and Input-Output Accounting.[6] The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Management-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.[7]
Robin Cooper and Robert S. Kaplan, proponents of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems. These traditional costing systems are often unable to determine accurately the actual costs of production and of the costs of related services. Consequently, managers were making decisions based on inaccurate data especially where there are multiple products.
Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way, ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for more costly products.
Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective.[8] They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
Like manufacturing industries, financial institutions have diverse products and customers, which can cause cross-product, cross-customer subsidies. Since personnel expenses represent the largest single component of non-interest expense in financial institutions, these costs must also be attributed more accurately to products and customers. Activity based costing, even though originally developed for manufacturing, may even be a more useful tool for doing this.[9][10]
Activity-based costing was later explained in 1999 by Peter F. Drucker in the book Management Challenges of the 21st Century.[11] He states that traditional cost accounting focuses on what it costs to do something, for example, to cut a screw thread; activity-based costing also records the cost of not doing, such as the cost of waiting for a needed part. Activity-based costing records the costs that traditional cost accounting does not do.
The overhead costs assigned to each activity comprise an activity cost pool.
From a historical perspective the practices systematized by ABC were first demonstrated by Frederick W. Taylor in Principles of Scientific Management in 1911 (1911. Taylor, Frederick Winslow (1919) [1911]. The Principles of Scientific Management. Harper & Brothers – via Internet Archive (Prelinger Library) Free access icon. LCCN 11-10339; OCLC 233134 (all editions). The Principles of Scientific Management – via Project Gutenberg Free access icon.). Those were the basis of the famous time and motion studies (Time and motion study) that predated the later work by Walter Shewhart (Walter A. Shewhart) and W Edwards Deming (W. Edwards Deming). Kaplan's work tied the earlier work to the modern practice of accounting.
Lean accounting methods have been developed in recent years to provide relevant and thorough accounting, control, and measurement systems without the complex and costly methods of manually driven ABC.
Lean accounting is primarily used within lean manufacturing. The approach has proven useful in many service industry areas including healthcare, construction, financial services, governments, and other industries.
Application of Theory of constraints (TOC) is analysed in a study[12] showing interesting aspects of productive coexistence of TOC and ABC application. Identifying cost drivers in ABC is described as somewhat equivalent to identifying bottlenecks in TOC. However the more thorough insight into cost composition for the inspected processes justifies the study result: ABC may deliver a better structured analysis in respect to complex processes, and this is no surprise regarding the necessarily spent effort for detailed ABC reporting.
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Methodology of ABC focuses on cost allocation in operational management. ABC helps to segregate
If achieved, the split of cost helps to identify cost drivers. Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions (cost driver) take at the counter and then by measuring the number of each type of transaction. For the activity of running machinery, the driver is likely to be machine operating hours, looking at labor, maintenance, and power cost during the period of machinery activity.
ABC has proven its applicability beyond academic discussion.[citation needed]
ABC
A report summarizes reasons for implementing ABC as mere unspecific and mainly for case study purposes[13] (in alphabetical order):
Beyond such selective application of the concept, ABC may be extended to accounting, hence proliferating a full scope of cost generation in departments or along product manufacturing. Such extension, however requires a degree of automatic data capture that prevents from cost increase in administering costs.
According to Manivannan Senthil Velmurugan, Activity-based costing must be implemented in the following ways:[14]
When ABC is reportedly used in the public administration sector, the reported studies do not provide evidence about the success of methodology beyond justification of budgeting practise and existing service management and strategies.
Usage in the US Marine Corps started in 1999.[15][16][17][18]
Use of ABC by the UK Police has been mandated since the 2003-04 UK tax year as part of England and Wales' National Policing Plan, specifically the Policing Performance Assessment Framework.[19]
Recently, Mocciaro Li Destri, Picone & Minà (2012)[20] proposed a performance and cost measurement system that integrates the economic value added (EVA) criteria with process based costing (PBC).
Authors note that activity-based costing system is introspective and focuses on a level of analysis which is too low.[citation needed] On the other hand, they underscore the importance to consider the cost of capital in order to bring strategy back into performance measures.[citation needed]
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Applicability of ABC is bound to cost of required data capture.[1] That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost. Hence the reported application for production tasks do not appear as a favorized scenario.
The potential problem with ABC, like other cost allocation approaches, is that it essentially treats fixed costs as if they were variable. This can, without proper understanding, give some people an inaccurate understanding which can then lead to poor decision making. For example, allocating PPE to individual products, may lead to discontinuation of products that seem unprofitable after the allocation, even if in fact their discontinuation will negatively affect the bottom line.
Even in ABC, some overhead costs are difficult to assign to products and customers, such as the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.
Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.
The prerequisite for lesser cost in performing ABC is automating the data capture with an accounting extension that leads to the desired ABC model. Known approaches for event based accounting simply show the method for automation. Any transition of a current process from one stage to the next may be detected as a relevant event. Paired events easily form the respective activity.
The state of the art approach with authentication and authorization in IETF standard RADIUS gives an easy solution for accounting all workposition based activities. That simply defines the extension of the Authentication and Authorization (AA) concept to a more advanced AA and Accounting (AAA) concept. Respective approaches for AAA get defined and staffed in the context of mobile services, when using smart phones as e.a. intelligent agents or smart agents for automated capture of accounting data .
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