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Activity-Based Costing in the Michigan’s Hospital

The case that we are supposed to discuss concerns the application of activity-based costing to the work of the critical care unit of a community hospital in Michigan. According to the case, the nurse manager is asked to apply the method to fight the decline of the productivity level of her unit. To begin with, activity-based costing is a costing method that involves a thorough analysis of the activities performed by a company and further evaluation of the resource consumption of every single activity. This method is considered to be an effective tool helping to fulfill various tasks such as improving the financial management system of a company and presenting a more accurate calculation of expenses. The effectiveness of activity-based costing was proved by many researchers (Shu, Weidong, Zhuo, Haibin, & Yaohui, 2014, p. 63). Such an approach is likely to help to reduce the negative consequences of the productivity decline of a critical care unit.

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In general, the response of the superior seems to be quite helpful as calculating the cost of each activity and service rendered in the critical care unit can help to avoid further financial losses and ensure that all the devoted funds are managed wisely. At the same time, I do not consider the superior’s decision to give this work only to the nurse manager to be the best. Even if we consider that the referral tasks of a nurse manager include preparing and correcting the annual budget, she may need to consult with the specialist possessing more specific knowledge on the use of this costing method. Activity-based costing will be quite useful as thorough analysis helps to evaluate the importance and efficiency of each activity. The information on inefficient and unnecessary processes appears to be very helpful when there is a need to reduce costs. Besides, activity-based costing helps to increase the effectiveness of the work. Due to the analyzed data, managers can understand which processes and activities should be allocated the additional resources in order to raise the overall effectiveness of the work of certain hospital unit.

In order to apply the activity-based costing method, nurse manager will have to make a few steps. First of all, she will have to study the working process of her critical care unit extensively, and then define and list all the operations or activities that are performed by its staff. Then, she will need to calculate the cost of each activity and lay down the order of priority to decide which activities should be allocated more funds on, and which ones are overestimated (Hada, Chakravarty, & Mukherjee, 2014, p. 241). In the end, necessary calculations and the results will have to be double-checked in order to exclude a possibility of a mistake.

As for the consequences of the use of activity-based costing, it will be likely to produce an advantageous effect on the productivity level of critical care unit, and prevent it from further decrease. Activity-based costing is considered to be more rational if compared to the traditional approach. It provides manager with an opportunity to make a conclusion about productivity and profitableness of the activity taken by itself. Of course, this method also has certain disadvantages; due to the large amount of data, it takes quite a lot of time to perform all the calculations. Furthermore, this approach involves researching numerous details and it may sometimes distract manager’s attention from overriding priority of the company. Nevertheless, the application of this method is likely to increase the productivity of the hospital unit.


Hada, M. S., Chakravarty, A., & Mukherjee, P. (2014). Activity based costing of diagnostic procedures at a nuclear medicine center of a tertiary care hospital. Indian journal of nuclear medicine: IJNM: the official journal of the Society of Nuclear Medicine, India, 29(4), 241-245.

Shu, F., Weidong, Z., Zhuo, L. Z., Haibin, C., & Yaohui, Z. (2014). The application of time driven activity-based costing in fine cost management of the hospital. Jiangsu Healthcare Administration, 6(1), 63.

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StudyCorgi. 2020. "Activity-Based Costing in the Michigan's Hospital." December 28, 2020.


StudyCorgi. (2020) 'Activity-Based Costing in the Michigan's Hospital'. 28 December.

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