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Product Costing Techniques in Health Care Organizations

In the contemporary business environment product costing techniques play an important part in the introduction of new products, especially in the health care industry, where rising costs become a substantial barrier on the access to health care for a large number of people. In such a situation, the application of an effective product costing techniques can be very helpful but organizations need to understand the essence of different costing techniques. In such a way, they can apply the most effective product costing technique, taking into consideration their needs, environment, and organizational structure and operations.

In fact, today, there are a lot of product costing techniques, which may vary consistently from each other but they may be effective in specific environment and conditions. In this respect, it is possible to refer to one of the most popular and trendy product costing technique – the activity based costing. The activity based costing focuses on specific activities and definition of costing on the ground of specific activities. In such a way, the activity based costing is effective, when organizations need to conduct diverse activities and adapt costing to specific activities. This approach is particularly effective in the health care environment because the activity based costing allows developing costing respectively to activities conducted by health care organizations. As a result, they can save funds because they spend costs on specific activities only. In addition, this approach allows health care organization to adapt fast to the changing business environment and customers’ needs.
The price-led costing is close to traditional costing techniques. The price-led costing technique focuses on the price as the determinant factor for the costs of products. In such a way, the price-led costing technique implies that the costs of products are defined on the ground of the current prices and the price established by competitors. For instance, a health care organization can compare its price and costs to the price of its competitors and develop costs within the scope of the average price established in the market.

In additional, the marginal costing sets organization within the framework of maximum and minimum costs an organization can spend on the development and creation of a product. In such a way, health care organization can use the marginal costing, when they are limited in financial resources and need to operate within the set framework of the established costs it normally spends on the development and introduction of a product.

Today, the life-cycle costing becomes more and more popular. Total life-cycle costs are minimized for both the producer and the customer. Life-cycle costs include purchase price, operating costs, maintenance, and distribution costs (). This cost technique may be applied in the health care environment because it contributes to the minimization of costs spend on the development and introduction of the product.

Finally, it is worth mentioning the target costing. In case of the target costing, market prices are used to determine allowable – or target – costs. Target costs are calculated using a formula similar to the following: market price – required profit margin = target cost (). This costing technique may be effective for health care organizations, when they focus on the development of specific products and are limited in their financial resources.

Thus, different costing techniques may be used in the contemporary health care setting.

References:

Ansari, S., Bell, J. and Swenson,D. (2006) A Template for Implementing Target Costing. Cost Management 20 (5); p. 20-28.
Fahrenbach, J. (1999). The ABCs of price-led costing. Best’s Review, (Life/health insurance edition) 100 (5), 69-70.
McNair, C. J. (2007). Beyond the Boundaries: Future Trends in Cost Management. Cost Management 21 (1); p. 10-22.