Dealing with the complexity of costing services

By Rob McKie - June 16, 2016

The health and care sector in Australia is increasingly moving towards portable funding models currently being used in other parts of the world.

 Research1 from these countries suggests that consumers will likely see a greater continuity of care, and will have greater control over where their funding is directed.

While market participants are likely to benefit from this change, the new model means those operating in the health and care sector will be operating in a more competitive environment.  In order to offer the best value for money to attract and retain clients, service providers will need to focus on understanding their true cost of service delivery, allowing them to improve their efficiency.

The Activity Based Costing (ABC) method allows providers to build up the cost of delivery for a single unit of service by understanding the mix of inputs and resources that are used to deliver that service.  Say, for example, your organisation runs day programs, and your “unit” of service delivery is 1 hour (for costing purposes).  You incur a range of direct costs in delivering that hour of service such as support worker wages, and direct materials (such as food, or supplies for activities).  There is also a portion of overhead costs which contribute towards the delivery of those activities such as CEOI and management wages, insurances, accounting costs or IT infrastructure costs.  Direct costs can be directly allocated whilst overhead costs will need to be attributed based on the units of measure (such as hours in this example).

table of points to keep in mind

The process of costing is complex, time consuming and, in reality, is never complete as you will always have to monitor and adjust for changing circumstances.  Keeping these points in mind, as well as appreciating that it is an iterative process, can help put structure in place for the success and sustainability of your organisation.

1Final Report: Funding and service options for people with disabilities, June 2009, Griffith University School of Human Services and Social Work. Click here to view


Article prepared by Chris Nash in conjunction with Rob McKie


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