which can be determined for a product. Indirect cost, on the other hand, includes factory overhead and similar cost elements that cannot be assigned to a specific product or service.
In process costing, the cost for each product is not calculated. Instead, the costs are calculated for an entire batch, or service provided for the entire month. This way, it is easier and cheaper to calculate the costs rather than to attempt to determine costs for each unit of output; however, the costs calculated can be used to determine average costs for each unit. The process costing technique, thus, is inherently inaccurate.
Process costing technique is most suitable for industries with similar types of products or services produced in an assembly like fashion. In health care industry, although it can be argued that patients usually have similar problems (after all, all are human beings) and require similar treatment. However, the treatment does not follow a fixed approach (for example, not all patients suffering with influenza are recommended the same medicine). The treatment differs based on patients' past history, allergies to certain medicines and other factors. Thus it may not be practicable to implement process costing technique in the health care industry.
Job order costing differs from process costing in the way it captures costs. In contrast to process costing method, job order costing method calculates costs of each job instead of an entire process. For instance, using job order costing method, a company can determine the cost of fixing doors to an automobile assembly. Using the process costing method, the cost of entire process (assembling the automobiles with all parts) would be calculated instead. Job order costing is usually used for one-time, unique, or specially ordered products.
To calculate job order cost, the direct costs are taken based on actual values whereas the indirect costs are computed as a percentage of direct material or direct labor consumption towards the job.
Job Order Costing for Health Care Industry
The job order costing for health care industry may take the form of identifying and calculating cost of fixing a new tooth within the overall dental checkup process at a dentist clinic. However, the application of job order costing in health care, though can be thought of, but are somewhat limited due to the nature of activities involved in health care industry.
Activity Based Costing
Activity based costing technique calculates costs based on actual consumption. This is carried out by identifying activities that are required to be undertaken to manufacture a product or to provide a service, and then identifying the actual costs that are incurred to complete these activities. The cost of the entire product or service is thus calculated.
Activity Based Costing in Health Care Industry
Activity based costing accurately provides the actual cost incurred on a product/ service; and thus it is widely used in industry nowadays. This is the main reason why health care industry uses activity based costing model to calculate costs of providing health care services. Prior to implementing this model in health care