Traditional cost accounting has been based on allocating a subjective or computed range of indirect expenses to direct costs. Activity Based Costing (ABC) offers an alternative approach. Much of textbook work on ABC refers to instances  from large-scale manufacturing, yet according to the UK government Statistics Office[1] small and medium–sized enterprises (fewer than 250 employees) account for 99.9 per cent of all enterprises in the UK private sector, while representing 59.8 per cent of employment and 49.0 per cent of turnover. The UK services industries account for around 75% of total value–added in the UK [2], while the Public Sector accounts for about 45% of total UK spending.

Required:

Discuss how a small UK health-sector service provider may employ ABC to (a) produce ‘product costs’ for services, and to (b) find out the internal efficiency, quality and profitability per product or service line. Both benefits and drawbacks must be considered.
Your answer should be supported by reference to relevant literature, logical argument, and should consist of worked exs to illustrate your arguments. All reference to literature should be referenced in Harvard Style. The reliability and validity of all literature should be considered except where its source is a peer-reviewed journal. The literature you refer to does not require to be regarding small UK health-sector service providers: you might find journal articles from other countries, or about non-health-sector small service providers, or articles about large enterprises. Such articles may aid you to discuss applying the principles of ABC from one service organisation to another, from one country to another, or to discuss differences between large and small organisations.

Appendices are limited to three pages and MUST be referred to in the body of the essay.

Word limit: 2500 (not including references section or appendices)

AMA coursework, rationale for focusing on service sector/public sector is that:

a) This covers the largest proportion of economic activity in UK but is largely ignored by textbooks – if you are to understand ABC you must understand it in the context of all sectors (manufacturing is well covered in the textbooks).

b) It is an opportunity for you to do some wider reading and not rely solely on the textbooks and lectures – at your level it is significant to demonstrate that you have engaged in self-directed learning.

c) By focusing on a context not covered in lectures you will require to think carefully about ABC, not just in terms of product costing, but in terms of evaluating internal efficiency, quality and profitability per ‘product’ or service line – there is some work in the literature on this; and also on cost/advantage.