Unionville Children’s Hospital like many health care facilities has experienced decreased payments from both insurance companies and the federal government. This decreased reimbursement has made it necessary for this hospital to not only cut costs but also identify the source of these costs enabling necessary adjustments to be made. Accurate knowledge of cost drivers can allow the hospital to run efficiently given new cost constraints while maintaining a high level of patient care. The objective of conducting an ABC analysis is to provide more accurate and detailed cost information material to management’s decision making. Through this analysis management can make more informed decisions regarding resource allocation and pricing.

Manufacturing companies have traditionally been the primary users of ABC, however ABC can be useful for service-based organizations like this hospital. ABC describes costs, activities and products or outputs of an organization. This hospital is not a factory and should not be treated like one. However this hospital like all organizations (service based to manufacturing) transfers inputs – resources and activities – that are turned into outputs – using resources and productive activities. The resources for this hospital are skilled staff and facilities, which are used for diagnosis and treatment to improve patient health.

ABC costing is also very helpful when the costs are variable meaning they change with the amount of activity and when procedures such as jobs, services and products differ causing varied consumption of resources. ABC is used in manufacturing where costs are variable and different products are manufactured. This is precisely why it is advantageous for ABC to be applied at Unionville hospital. The type of nursing provided and supplies used vary per patient and each patient receives the care they need, not an identical level of care.

Using average cost per patient is misleading because it takes into a consideration a large range from the cost of an intensive patient to the cost of a patient solely under supervision. An acute patient and a patient under supervision use very different amounts of the hospitals resources. This figure assumes that every patient is approximately average when that is not truly the case. There will be few patients who are at the average cost. Intensive patients will use much more than this cost while a ‘typical’ patient will use far less. The result is that the cost for an intensive patient is understated and the cost for a ‘typical’ patient is overstated. A typical patient will then shoulder the cost of an intensive patient, while the intensive patient pays far less than they should. The impact of this misleading information will cause management to make poor decisions. Management will assume intensive patients cost far less than the actually do. Management is responsible for making decisions about pricing and product (services) that they choose to offer. For example if management thinks intensive patients are not very costly, they may introduce new treatments for intensive patients which will increase not only overall costs, but costs shouldered by ‘typical’ patients who will not use this