Overview of Sonic Healthcare

In this current report, the effective of Time-Driven Activity–Based Costing System (TDABC) is discussed from the viewpoint of a graduate consultant employed in a consultancy firm. It is assumed that a main client of the consultancy firm is Sonic Healthcare, which is one of the leading healthcare service providers of Australia. The report provides a brief overview of the business operations of Sonic Healthcare. The second report deals with a closer investigation of the definition and features of TDABC. The latter part focuses on analysing the points of differences between the three types of costing systems prevalent in the global business firms. Finally, the report sheds light on evaluating the suitability of implementing TDABC system within Sonic Healthcare.  

Sonic Healthcare is an Australian organisation providing pathology, laboratory services and radiology services with an employee base of around 32,000 (Sonichealthcare.com 2018). It has global presence in New Zealand, USA, UK, Switzerland, Germany, Ireland and Belgium. It is one of the biggest medical firms listed on ASX and the strategy of the organisation in order to ensure growth is through acquisition of cross-border firms. This is because the opportunity of the organisation is limited to diversify further in the Australian market. The organisation has generated nearly 60% of its revenue from business operations outside Australia.

It has been identified that there are certain issues involved with ABC system. In order to cover these loopholes, TDABC system is developed due to its cheap, simple and powerful features compared to the traditional ABC system. As laid out by Akhavan, Ward and Bozic (2016), TDABC system simplifies the process of costing by eliminating the need to survey and interview employees in order to allocate resource costs to activities before they are driven down to cost objects. The orders, customers and products constitute of the cost object.

With the help of the TDABC system, the resource costs could be allocated to the cost objects. This is carried out through an appropriate framework needing two kinds of estimates and these could be accomplished, as the organisation might not encounter different complexities (Bahr and Price 2016). Hence, TDABC system possesses the following set of characteristics:

• TDABC system is used to compute the cost pertaining to the supply resource capacity. For example, a department of Sonic Healthcare could be considered associated with handling the orders of the customers. Under this system, the supervision cost, equipment cost, cost related to resource personnel, cost of occupancy and technology passed over to the department are calculated.It distributes the overall cost by the capacity of time present from the staffs performing the work of the department in arriving at the rate of cost capacity.
• The TDABC system is related to the rate of cost capacity in order to push the departmental resource costs to cost objects by anticipating the demand of resource capacity. This is adjudged critical to all the cost objects.If the above department is considered, TDABC system needs an estimation of needed time in processing a specific customer order (Barros et al. 2017). However, each customer order is not required to be matched in this system. Conversely, it enables time estimate to change based on specific demands and orders. Thus, it helps in simulation of the actual processes used to conduct activities throughout the organisation (Donovan et al. 2014). With the help of TDABC model, Boral could find it easier for embracing difficulties, instead of being compelled to use inaccurate and simplified ABC system for budgeting system.

Both the ABC and TDABC systems are founded in 1980 and the founder of these two systems is Robert Kaplan. It has been evaluated that the traditional costing system has failed to allocate overhead effectively and it could not identify the customers, from which the business would be benefitted mostly. Thus, the above-stated two models have been initiated (Fleming et al. 2016). Along with this, gauging an activity cost is a significant function from the organisational perspective. However, both the systems have the ability to compute the total profitability of the customers. This would place the firms in an advantageous position by obtaining trustful and accurate information through recognition of the drivers of cost. The below-stated drivers are few major cost drivers:

• Partially exact and minimised expenditure drivers known as the quantity drivers
• Minimum accuracy and minimum expense drivers known as the duration drivers
• Increased accuracy and expense known as the intensity driver

Evaluation of Time-Driven Activity-Based Costing System (TDABC)

Therefore, the major differences between traditional costing, ABC and TDABC systems are described briefly as follows:

Many global organisations today are still using this type of costing system for allocating manufacturing overhead to the produced units. It is assumed on the part of the system users that volume metric could be identified as the key driver of cost and it is associated with the manufacturing costs. The accountants distribute the manufacturing costs only to the products; however, they do not consider non-manufacturing expenses like marketing expenses in this system. The system is used primarily in outside financial reports, as the cost of sales carries adequate value.

Along with this, the traditional costing system is an old-fashioned costing system, as the organisations are aiming to maximise their production with the help of machines and computers (Hoozée and Hansen 2014). The system is outdated due to machines and computers, since the system uses direct labour hours for the computation of cost. Inaccurate cost of allocation might take place, as the direct labour hours could not be used as cost driver due to lack of efficiency. This is because this costing system negates the other cost drivers to be included in the total cost of the product. In addition, ineffective management decisions might be undertaken due to non-consideration of some non-manufacturing expenses.

Figure 1: Traditional costing system

(Source: Stouthuysen et al. 2014)

ABC system:

This type of costing system helps in providing accurate insight of the product cost; however, the firms use it mainly in the form of accelerated costing system. The allocation bases used in traditional costing system and ABC system differ from each other. Moreover, the ABC system ascertains each activity related to the item production and activity cost distribution. The cost apportioned to each activity is apportioned further to the required products for the activity of production.

The primary benefit of this system includes higher accuracy in costing. Moreover, this system eradicates the product cost apportionment, which is not adjudged as pertinent. The other advantages comprise of cost evaluation for internal management, ability to allow standards and better understanding of the overhead costs. However, this system could be a disadvantage for the organisations having limited funds, as it needs considerable resources and some users might not be able to interpret this system properly (Soliman et al. 2016).

Figure 2: Activity-based costing (ABC) system

(Source: Kaplan et al. 2014)

Time-Driven Activity-Based Costing (TDABC) system:

Differences between traditional costing, ABC and TDABC systems

TDABC system is a modified version of the traditional ABC model. The reason behind this is that various advantages are covered in this system, which the traditional ABC model fails to provide and these benefits are demonstrated as follows:

• TDABC model could work in collaboration with the customer relationship management system and ERP (Keel et al. 2017)
• TDABC system has the capability to manage additional number of transactions with rapid processing time by using the ERP system.
• The workers are notified regarding the unutilised resources for enabling the management to undertake effective decisions.
• Simple time estimations are used in this system for eradicating the need of developing subjective interview and process of survey to describe the cost drivers.
• The system could be implemented without introducing an effective ERP system for evaluating costs.

Figure 3: Time-driven activity-based costing system

(Source: Kaplan 2014)

The above evaluation clearly states that TDABC system is suitable to Sonic Healthcare due to greater visibility to capacity usage and efficacies and ability to anticipate future resource demands (Öker and Ad?güzel 2016). Sonic Healthcare has been facing competition, which necessitates the need for minimising production. With the help of this system, the organisation could gain competitive edge by apportioning support or indirect cost in a manner that the resulting cost information signifies accurate insight of resource needs and consumption by the customers and services.

Moreover, Sonic Healthcare could minimise its costs through effective management of resources, which would ensure competitive pricing structure (Parekh 2016). The anticipated per unit cost of transactions and enquiries of the customers might result to minimise costs and the organisation should not have to increase prices or compromise quality.

The management of Sonic Healthcare would be able to use minimised per unit cost of service for providing accurate and competitive costing of the healthcare products and services. Along with this, the TDABC system would enable the company to develop the cost of providing online service in contrast to the cost of giving the same with the help of conventional channels. It would allow the management to ascertain the services provided conventionally and online (Shu et al. 2014). The management of the organisation could obtain an appropriate insight of the overhead costs, since it provides details about the activities associated with providing both online and conventional services. Hence, Sonic Healthcare could undertake decisions in increasing the customer base, reducing costs and improving services.

The TDABC system is a platform providing effective and useful information to the managers without adequate expenses. Regardless of the business type, this system helps in giving cost-effective and accurate information pertaining to cost and hence, it is superior over the traditional ABC model (Silva and De Oliveira 2018). Thus, the implementation of TDABC system in Sonic Healthcare would enable in minimising the production cost, raising revenue base and increasing competitive edge in the operating market.

Conclusion:

The above evaluation clearly denotes that there are certain issues involved with ABC system. In order to cover these loopholes, TDABC system is developed due to its cheap, simple and powerful features compared to the traditional ABC system. TDABC system is suitable to Sonic Healthcare due to greater visibility to capacity usage and efficacies and ability to anticipate future resource demands. Sonic Healthcare has been facing competition, which necessitates the need for minimising production. The management of the organisation could obtain an appropriate insight of the overhead costs, since it provides details about the activities associated with providing both online and conventional services. Regardless of the business type, this system helps in giving cost-effective and accurate information pertaining to cost and hence, it is superior over the traditional ABC model. Hence, Sonic Healthcare could undertake decisions in increasing the customer base, reducing costs and improving services.

References:

Akhavan, S., Ward, L. and Bozic, K.J., 2016. Time-driven activity-based costing more accurately reflects costs in arthroplasty surgery. Clinical Orthopaedics and Related Research®, 474(1), pp.8-15.

Bahr, W. and Price, B.J., 2016. Radio frequency identification and time-driven activity based costing: RFID-TDABC application in warehousing.

Barros, R.S., Barros, R.S., Ferreira, A.M.D.S.D.C. and Ferreira, A.M.D.S.D.C., 2017. Time-Driven Activity-Based Costing: designing a model in a Portuguese production environment. Qualitative Research in Accounting & Management, 14(1), pp.2-20.

Donovan, C.J., Hopkins, M., Kimmel, B.M., Koberna, S. and Montie, C.A., 2014. How Cleveland Clinic used TDABC to improve value. Healthcare Financial Management, 68(6), pp.84-89.

Fleming, N.D., Lu, K.H., Calhoun, J.D., Jhingran, A., Arzu, I. and Soliman, P.T., 2016. Cost comparison of treating low-and intermediate-risk endometrial cancer using time-derived, activity-based costing (TDABC) in a large regional cancer network delivery model.

Hoozée, S. and Hansen, S., 2014. A comparison of activity-based costing and time-driven activity-based costing. Journal of Management Accounting Research.

Kaplan, R.S., 2014. Improving value with TDABC. Healthcare Financial Management, 68(6), pp.76-84.

Kaplan, R.S., Witkowski, M., Abbott, M., Guzman, A.B., Higgins, L.D., Meara, J.G., Padden, E., Shah, A.S., Waters, P., Weidemeier, M. and Wertheimer, S., 2014. Using Time?Driven Activity?Based Costing to Identify Value Improvement Opportunities in Healthcare. Journal of Healthcare Management, 59(6), pp.399-413.

Keel, G., Savage, C., Rafiq, M. and Mazzocato, P., 2017. Time-driven activity-based costing in health care: A systematic review of the literature. Health Policy.

Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.

Parekh, R., 2016. How time-driven activity-based costing reports affect healthcare outcomes (Doctoral dissertation, University of Pittsburgh).

Shu, F., Weidong, Z., Zhuo, L.Z., Haibin, C. and Yaohui, Z., 2014. The application of time driven activity-based costing in fine cost management of the hospital. Jiangsu Healthcare Administration, 6, p.063.

Silva, M.M.H. and De Oliveira, S.B., 2018, January. Proposal to Implementation Time-Driven Activity Based Costing (TDABC) for Calculation of Surgical Procedure Costs of a Medium-Sized Teaching Hospital. In International Conference on Information Theoretic Security (pp. 191-199). Springer, Cham.

Soliman, P.T., Garcia, E.A., Lang, K.E., Villanueva, V., Westin, S.N., Fleming, N.D., Feeley, T.W., Lu, K.H. and Meyer, L., 2016. Evaluation of resource utilization using time-derived, activity-based costing (TDABC) to result in more effective processes and cost reduction.

Sonichealthcare.com. (2018). Sonic Healthcare | Home. [online] Available at: https://www.sonichealthcare.com/ [Accessed 12 Jan. 2018].

Stouthuysen, K., Schierhout, K., Roodhooft, F. and Reusen, E., 2014. Time-driven activity-based costing for public services. Public Money & Management, 34(4), pp.289-296.