ABC has continued to evolve in healthcare. Many healthcare executives continue to ask how ABC can be applied in healthcare and how it relates to existing costing methods. Some hope it can offer a breakthrough or at least advantages over current methods, which are perceived variously as inaccurate or too costly to build and maintain. ABC offers advantages over traditional costing because it relates costs to activity drivers rather than just fixed and variable designations. Traditional methods of costing tend to bury overhead in product costs through very general allocations. In contrast, ABC attempts to tie areas usually thought of as overhead to their own activity measures. ABC attempts to reveal all activities contributing to cost, allowing managers to eliminate activities that do not add value, and thus ABC is often heard in connection with reengineering efforts. By identifying each activity, ABC can also better reveal expected or modeled resource use through Activity Based Modeling (ABM). ABC is also often mentioned in connection with supply chain management, as a means of identifying non-value-adding steps in the supply chain.
According to AccountingCoach.com (2012), Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.
In other words, ABC has a "cost-drivers", which are underlying cost associated with creating a product. These cost-drivers could be machine hours, labor costs, and raw material costs. The total costs associated with machine hours (cost of the machine or depreciation expense of the machine), labor costs, or raw material costs are all a part of the final price of a product. The traditional...