Bentleys National Aged Care Survey

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Activity-Based Costing for consumer directed care - 5 simple tips

Shutterstock _132318590Recently, we’ve been helping our clients in aged care answer some pertinent questions in relation to the sweeping changes to home care that took effect from 1 July 2015. The requirement to have individual budgets for all care recipients means that providers can no longer ‘cross-subsidise’ loss-making clients with profitable clients. This sharpens the need for providers to ask questions such as:

*Have I priced my service provision correctly?

*What is the best way to recover my overheads?

*Is the organisation making enough money to enable long term sustainable service provision to my aged care ‘clients’?

To answer these questions, providers need to have a detailed knowledge of the true cost of each service provided. The best way to do this is through an activity-based costing exercise, which can be tricky. To help navigate this process, we suggest the following five tips to assist you complete this initial analysis yourself.

1.  Keep it simple when developing an analysis of activity-based costs.  
It is essential that any model you develop can be easily understood and updated by your team as circumstances change over time. There is no point in having a highly-detailed spreadsheet or software package if it becomes so complex and hard to use that no one understands it.  It is worth sacrificing a small amount of accuracy and making a few broad approximations for the sake of simplicity and legibility.

2.  Activities to be costed should align with how you plan to charge your clients.  
The question of just how detailed to get with activity-based costing (and which activities specifically need to be costed) is answered by which activities you plan to charge for.  For example, if you plan to bill for coordination and direct home care separately, then those are the activities for which separate costs need to be derived.

3. Have a thorough job-costing accounting system in place. 
Most software packages allow the user to assign job codes to any given expense. Put procedures in place that ensure every expense is allocated a job code and any given job code can be easily reported on.  In relation to payroll data, one obvious way of recording the cost (or time spent) on different activities is to use timesheets.  Timesheets give a high level of accuracy, but can consume a significant amount of administration time and effort.  Alternatives might include using smart phone technology to track staff whereabouts or run timesheets on a sample basis over a short-period of time to obtain indicative trends. 

4. Decide how overheads will be allocated across different activities.  
How do you allocate overhead costs across different services that the organisation provides? You could allocate based on the revenue or profit of the service, however revenue is often determined by external market factors or the fickleness of government funding bodies.  A better option is to allocate in line with the % of staff working in that service line or the % of labour hours.

5. Conduct a scenario analysis.
Activity-based-costing is a constantly a moving target.  Changes in the market such as price pressure, customer needs and regulatory changes mean that you can’t rely on a single set of numbers.  After establishing a base set of unit costs, consider conducting a scenario analysis to understand the potential impacts of:

1.            Imminent program or business unit closures
2.            Anticipated changes in staff
3.            Proposed major capital works or expansion
4.            Differing numbers of clients with differing levels of care
5.            Changing customer service requirements from your organisation
The brave new world of consumer directed care has already commenced in Home Care from 1 July 2015. This is forcing providers to move from Government-led thinking to market driven consumer expectations.

Whilst you adapt your business models it is important to ensure these are financially sustainable.  These tips will help you think ahead and thrive through all reform.