In 1989, a Harvard Professor (R. Kaplan) coined the phrase “Activity Based Costing”. In subsequent articles and books expounding the ABC methodology, a somewhat confusing set of “resource drivers” and “cost drivers” were introduced to more accurately determine the cost of a product being produced. Within six years, the Kaplan approach was abandoned. But the name “ABC” and the principle objective of the method lived on.
The CostFlex ABC system is not based on the Kaplan approach. It is based on a very strict, meticulous, and precise cost determination process invented in 1974 for matching known expenditures (like the paid salaries of individual staff members) to each work task or procedure used in the care and treatment of each discharged patient. And, the CostFlex approach handles all overheads just as precisely as it does the direct variables.
The CostFlex ABC method is so punctilious that it can’t be performed manually. A computer must be used to complete all the required calculations to determine the actual and exceedingly accurate cost of each patient.
“Activities” in the CostFlex System are called “work tasks”. They include all the hospital’s charges and any other work activities performed by paid staff that are counted, given a control number, and given a title.
Each month, the closed general ledger trial balance and the count of all work tasks are downloaded to the hospital’s PC computer. A click of a mouse starts the cost determination process where tens of thousands of stored “expense directing commands” subtract focused cost amounts (aka – “direct variable”) from specific expense accounts and add these same amounts (double entry bookkeeping) to one of the cost accumulators of a work task.
At the completion of the 3 minute process, all of the money downloaded for the month are resident in the cost accumulators and available for use by all the various downstream applications like patient costing and service line costing.