Activity-Based Costing and Capacity

Robert S. Kaplan

Background Note | HBS Case Collection | March 2005 (Revised March 2006)

Activity-Based Costing and Capacity

Abstract

Discusses the use of budgeted rather than historical data in an activity-based costing (ABC) model and argues for calculating rates using practical capacity, not actual utilization. An ABC model need not be limited to analysis of historical data. When cost driver rates are calculated based on forecasted data, they can be used proactively for decisions such as pricing and order acceptance. Second, to avoid distortion of cost driver rates caused by unused capacity, the rates should be calculated using the practical capacity of the resources performing the activity. Discusses how to estimate practical capacity in various situations, including lumpy capacity acquisition, ramp-up of capacity utilization, seasonal and peak-load capacity, and differing service quality levels from supplied capacity.

Keywords: Activity Based Costing and Management; Accounting Industry;

Format: Print

10 pages

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Citation:

Kaplan, Robert S. "Activity-Based Costing and Capacity." Harvard Business School Background Note 105-059, March 2005. (Revised March 2006.)

Leaders at six hospitals conducted a research study to assess and compare the health outcomes and costs of pediatric aerodigestive care. Four of the hospitals delivered care with an integrated practice unit (IPU) while two delivered care traditionally, with isolated specialists. The study used time-driven activity-based costing as a tool to measure and compare costs across the six sites. The results demonstrate that the four IPU sites improved clinical outcomes and had lower costs of care.

Value-based care models are becoming instrumental in structuring clinical care delivery in our healthcare climate. Our objective was to determine the value associated with implementation of a Family-Centered Care Coordination (FCCC) program for neonates undergoing tracheostomy.

Article | American Heart Journal

Are Cost Advantages from a Modern Indian Hospital Transferable to the United States?

R. S. Kaplan, F. Erhun, V.G. Narayanan, B. Mistry and K. Brayton, et al

We use time-driven activity-based costing to estimate the cost of personnel and space for an elective coronary artery bypass graft (CABG) surgery at two U.S. hospitals, Intermountain and Baylor Heart, and Narayana Health (NH), in India. All three hospitals use modern management methods to achieve excellent patient outcomes. We use variance analysis to remove the effect of differential prices paid for personnel and space at the three hospitals. NH, even at U.S. price levels, retains a cost advantage over the two U.S. hospitals by shifting tasks to less-credentialed and/or less-experienced personnel, supervised by highly-skilled personnel, a practice facilitated by NH’s high annual CABG volume. NH offsets some of its task downshifting cost savings by having lower-skilled employees spend more time counseling patients and their families for in-hospital and home recovery. NH’s cost-saving practices could be captured by U.S. hospitals by relaxing hospital and health professional licensing regulations, encouraging greater family participation in inpatient care, and performing complex surgeries in high-volume regional centers of excellence.

Keywords: Time-Driven Activity-Based Costing; Health Care and Treatment; Cost; Organizational Structure; Performance Efficiency; India; United States;

Citation:

Kaplan, R. S., F. Erhun, V.G. Narayanan, B. Mistry, and K. Brayton, et al. "Are Cost Advantages from a Modern Indian Hospital Transferable to the United States?" American Heart Journal 224 (June 2020): 148–155. View Details

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Activity-Based Costing and Capacity

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