Application of activity-based costing (ABC) for a Peruvian NGO healthcare provider

This article describes the application of activity-based costing (ABC) to c alculate the unit costs of the services for a health care provider in Peru. While traditional costing allocates overhead and indirect costs in proport ion to production volume or to direct costs, ABC assigns costs through acti vities within an organization. ABC uses personnel interviews to determine p rincipal activities and the distribution of individual's time among these a ctivities. Indirect costs are linked to services through time allocation an d other tracing methods, and the result is a more accurate estimate of unit costs. The study concludes that applying ABC in a developing country setting is fe asible, yielding results that are directly applicable to pricing and manage ment. ABC determines costs for individual clinics, departments and services according to the activities that originate these costs, showing where an o rganization spends its money. With this information, it is possible to iden tify services that are generating extra revenue and those operating at a lo ss, and to calculate cross subsidies across services. ABC also highlights a reas in the health care process where efficiency improvements are possible. Conclusions about the ultimate impact of the methodology are not drawn her e, since the study was not repeated and changes in utilization patterns and the addition of new clinics affected applicability of the results. A potential constraint to implementing ABC is the availability and organiza tion of cost information. Applying ABC efficiently requires information to be readily available, by cost category and department, since the greatest b enefits of ABC come from frequent, systematic application of the methodolog y in order to monitor efficiency and provide feedback for management. The a rticle concludes with a discussion of the potential applications of ABC in the health sector in developing countries. Copyright (C) 2001 John Wiley & Sons, Ltd.