Page 5 - CIMA MCS Workbook February 2019 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

More bespoke procedures would be very difficult to set standards for, due to the varying nature
of the procedures.

If accurate standards cannot be set, then there will always be variances in relation to the costs
and much time may be spent trying to explain these variances which, in reality, should have been
expected due to the nature of the procedures.

Analysing costs into very small increments, such as the quantity of amalgam used on a filling
leaves lots of scope for error. A very small error in the determined standard for one filling will
lead to large variances.

To fully cost out each procedure, all costs such be converted into standard, including the rent,
rates, depreciation, reception, administration and many other costs. As many of these costs are
not incurred in proportion to the level or nature of procedures undertaken by the dentists, much
of the standard setting would have to be done on an arbitrary basis, leading to less value in the
analysing of subsequent variances.

It is possible to restrict the application of standard costing to those costs directly related to the
procedures undertaken and use a separate method of cost control to fixed overheads, although
this would restrict the calculation of full cost and profitability per procedure.

There would be a significant amount of time, effort and cost in producing an appropriate set of
standards and these standards would have to be reviewed and potentially changed on a regular
basis, such as whenever updated technology is introduced or new, high tech materials are used.

Activity based costing

The principles of activity based costing (ABC) are not too far removed from those of standard
costing. Activity based costing involves the use of standards set on an activity basis rather than
directly on a unit of output.

Some of the standards may be similar under ABC. For example, the activity of performing a filling
would have a standard set for it.

But ABC aims to focus more on those costs that are not directly related to the procedures
themselves, i.e. the overheads.

Rather than allocate overheads on an arbitrary basis, it aims to allocate them via the use of cost
drivers, those activities that genuinely drive overhead costs to be spent.

For instance, the activities of the receptionists would all be classified as overheads. A receptionist
may spend much of their day receiving calls, incurring costs of phone usage, their salary, any
stationery used, the use of the IT system, heat and light in the office, etc.

ABC would aim to cost out the activity of answering the phone and then charge the cost to the
patient procedures on the basis of how many phone calls the receptionist generally takes per
procedure, which in many cases would be one call to make the appointment.

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