Table 2.
Established cost-accounting terminology for top-down and bottom-up methods.
Source: Own elaboration. Some definitions are adapted from Atkinson et al. (2001) [7], and from The Accounting Tool Sites (www.accountingtools.com)
| Term (and synonyms, if any) | Definition in cost accounting | Explanation and example |
|---|---|---|
| General terms | ||
| Direct cost | A cost of a resource or activity that is acquired for or used by a single cost object | An expenditure that can be directly traced in the organisation’s management accounting system to a particular cost object, e.g. a pharmaceutical that is used exclusively for treating a particular diagnosis-related group (DRG) and no other |
| Indirect cost (also known as variable overheads) | The cost of a resource that is acquired to be used by more than one cost object, but is a variable cost, that is, the quantity used increases with the number of patients treated | E.g. Expenses which are recorded at departmental level which are shared between several patients, such as medical staff or nursing staff |
| General overhead (also known as fixed overheads) | Expenses which are incurred at organisational level, do not vary with the number of patients treated, and are shared between several departments | E.g. amortisation of buildings, staff training costs, cost of water, electricity and heating |
| Terms used in top-down costing | ||
| Top-down costing | A costing method where the organisations direct and indirect costs incurred over a given period are assigned to (or “absorbed” by) all the cost objects produced by the organisation | Direct costs are identified directly to cost objects. Indirect costs are “apportioned” to cost objects. In full costing, both variable and fixed overheads will be apportioned to cost objects |
| Variable top-down costing | A top-down costing method. Organisational direct costs and variable overheads will be assigned to all the cost objects. Fixed overhead costs are not assigned to cost objects | Sometimes used in decisions where the organisations wishes to estimate the marginal cost of its products |
| Full absorption costing (or full costing) | A top-down costing method. 100% of an organisations costs incurred over a given period are allocated to all the cost objects | Direct costs, variable overheads and fixed overheads are apportioned to cost objects. Sometimes required by financial reporting standards |
| Activity—based costing | A method of top-down micro-costing | Indirect expenditure is first allocated to tasks or activities, so that it can be apportioned to cost objects at a more detailed level of disaggregation than used in traditional top-down gross costing |
| Cost centre | Responsibility centre in an organisation where the cumulative operating expenses of a group of similar activities are recorded over a finite period of time. | E.g. a hospital laundry department cost centre might record the costs of staff and consumables used to operate the laundry service over a year. The cost centre would probably not include the costs of general hospital overheads such as maintenance of the building, or capital expenditure such as purchase of machinery |
| Cost pool (or activity cost pool) | Term used in Activity-Based Costing referring to an aggregate of all the (indirect and possibly overhead) costs associated with a particular task | In ABC, if a cost centres records expenditure related to multiple tasks, these tasks are first disaggregated to more detailed “activity cost pools” before being apportioned to cost objects using micro-data |
| Cost object (“output”) | Final product, process or service that are going to be costed | E.g. Hospital GRDs. Normally in top-down methods, all final services performed by the organisation during the accounting period will be costed |
| Activity cost driver/resource/activity | Measures that identify the linkage between indirect expenditure and cost objects. They serve as quantitative measures of the activity undertaken by cost centres | The costs of the laundry department might be allocated to cost objects in proportion with the number of days that patients spend in hospital (days in hospital is the activity cost driver for laundry department expenditure) |
| Activity cost driver rate (“unit cost”) | The amount determined by dividing the indirect activity expense by the total quantity of the activity cost driver | If the annual laundry department expenditure is 55.000€ and the laundry serviced 11.200 patient bed-days during the year, the activity cost driver rate will be 4.91€/day |
| Terms used in bottom-up costing | ||
| Bottom-up (also known as variable costing or direct costing) | Cost components are valued by identifying resource use directly employed by each patient | Patient-specific costs |
| Cost object | Final product, process or service that are going to be costed | In bottom-up costing, usually only one cost object will be costed, e.g. cost of a specific surgical procedure and associated hospital stay |
| Resource | All materials, facilities, personnel, and anything else that is used for providing health care services | Medical, administrative and nurse staff, medical devices, health products, buildings, water, electricity, etc. |
| Unit cost | Refers to the marginal cost of providing a single unit of resource. Variable and sometimes fixed overheads are often approximately included by applying a percentage “mark-up” on direct cost, or by applying an average overhead “cost per day” | One hour of surgeon time, price of a dose of medication, etc. |