Learning Your ABCs

Activity-based costing is the new buzzword around our industry. Everyone is talking about it, but what is it really and how can it help you?

If you look at that new Dell computer you got such a great deal on and wonder how they can sell their computers for such a low price, the answer is as easy as ABC, or activity-based costing. Dell knows exactly how much the company spends at every step of the process.

How do they do that? Well, being a multi-billion-dollar corporation with a huge accounting department helps, but Dell started just like every other company — small. The main difference between their business and yours (other than the obvious industry differences and that billion-dollar range) is that Dell knows exactly, to the penny, how much each computer, monitor and mouse costs and, therefore, exactly what the company must charge for those products to get its desired level of profit.

The company is also able to identify areas that can be improved or eliminated and still be able to deliver a great product and service. They monitor these costs constantly and adjust processes, and occasionally pricing, to achieve the profit level they need.

Basically, activity-based costing allows you to simplify your business and improve its processes by modifying or eliminating anything that is not necessary or does not add to profit.

You will first need to define your company’s activities. These are the processes, functions or tasks that occur over time and have recognized results, like services, events or information. Activities also use up assigned resources to produce products or services. Understanding these activities is crucial in order to perform activity-based costing, since activities are the building blocks of any business process.

Make sure you include your employees in this process, as they are the ones carrying out these activities every day. Ask them to describe what they do and how they do it. Evaluate what they tell you and make sure you are not duplicating processes here. This step alone can help identify any problem areas in your company that you may not even be aware are occurring

Once the activities have been identified, make a list of them — in laymen’s terms — that will allow all employees to understand what each is and see why each has a cost associated with it.

Activities also need to be categorized as value- added or non-value-added. Value-added activities are those that customers are willing to pay for, such as the products you supply (wheelchairs or walkers, etc.). Non-value-added activities are those that the customer is not willing to pay for, that create waste, add cost to the product or result in a delay of some sort (like processing denials or a driver getting lost).

Once they are categorized, assign resources to the activities that will allow them to take place. (An activity without an assigned resource cannot occur). This will allow you to determine a cost for the activity, which, in turn, will allow you to determine a price for that activity. This process helps you to see actual dollars associated with activities, and that should allow you to streamline or eliminate activities that add no value.

Now you need to find your company’s baseline so you can measure future performance. A baseline is documentation of policy, practices, measures, methods, costs and their interrelationships at a particular point in time, in this case, the beginning of activity-based costing. After a baseline is established, you can measure the effectiveness of your efforts.

To win at competitive bidding, you’re going to have to know how much each piece of equipment is costing you, know the profit you need and plan for future expenses. With activity-based costing, you will have the ability to make decisions based on facts and not unknown variables. You will be able to shoot for, and have a reasonable certainty of obtaining, your profit-level goal. You will also be able to identify any reasons you are not at your desired profit level and make the appropriate changes.

Just make sure you do your first analysis correctly and completely. I guess you could compare it in a way to getting proper intake. (Sorry, I just had to add in a little bit of reimbursement).

Jane Bunch is vice president, HME consulting, for Atlanta-based CareCentric. A reimbursement specialist, Bunch delivers educational seminars worldwide, helps develop corporate compliance plans and serves as a consultant for fraud and abuse cases. She can be reached at 678/264-4495 or via e-mail at [email protected].