QUALITY

ASSURANCE

PROJECT

O P E R A T I O N S R E S E A R C H R E S U LT S

Application of Activity-Based
Costing (ABC) in a Peruvian
NGO Healthcare System

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 OPERATIONS RESEARCH RESULTS

Application of Activity-Based
Abstract
Costing (ABC) in a Peruvian
This paper describes the application
NGO Healthcare System
of activity-based costing (ABC) to cal-
culate unit costs for a healthcare or-
ganization in a developing country. It
also describes the ways in which
these calculations can provide infor-
mation for improving the efficiency
and quality of healthcare services. Table of Contents
The study was conducted from June
1, 1997 through May 31, 1998 at the
MaxSalud Institute for High Quality
Health Care, a nongovernmental, I. INTRODUCTION ................................................................................................... 1
nonprofit healthcare provider in
Chiclayo, Peru. At that time, Departments in the MaxSalud Study ................................................................ 1
MaxSalud consisted of a manage- A. Activity-Based Costing Versus Traditional Costing ....................................... 2
ment support unit (MSU) and one
clinic in each of the communities of
Balta and Urrunaga. II. METHODOLOGY ................................................................................................. 2

Traditional costing frequently allo-

cates overhead and other support III. RESULTS ............................................................................................................ 3
costs on the basis of units of produc- A. Determination of Unit Costs ......................................................................... 3
tion. ABC, on the other hand, assigns
B. Pricing and Calculation of Subsidies ............................................................ 4
these costs through the principal ac-
tivities performed within an organiza- C. Analysis of Non-Value-Added Activities ....................................................... 6
tion, linking indirect costs to services D. Analysis of Secondary Activities ................................................................... 6
and products through time allocation
E. Standard Cost Analysis ............................................................................... 7
and other tracing methods. The re-
sult is a more accurate estimate of F. Projections and Simulations ......................................................................... 7
real unit costs. G. Requirements for Implementing ABC ........................................................... 7

Methodology
The design of the study had two ma- IV. CONCLUSIONS AND DISCUSSION ................................................................... 8
jor components: (a) development and
implementation of an activity-based
REFERENCES ......................................................................................................... 9
costing model and (b) evaluation of
the results and usability of the model.
SUGGESTED READINGS ........................................................................................ 9
Results
The ABC model and its associated
methodology were successfully
implemented. Unit costs, including
reasonable allocations of overhead

Continued on page ii
Abstract Continued Acknowledgements
and other indirect support costs to spe- This paper was written by Hugh Waters, Hany Abdallah, Diana
cific services, were shown to represent Santillán, and Paul Richardson. The authors gratefully acknowl-
a more accurate estimate of the full unit edge the collaboration and support of the staff at MaxSalud,
cost of services than traditional account- including, the invaluable input of Dr. Filiberto Hernandez, MaxSalud
ing methods. Used together with infor- project director; Dr. Roberto Villanes, executive director and
mation on the volume of services, ABC principal MaxSalud counterpart; and the members of the ABC
analysis can guide pricing and identify Implementation Team: Fabiola Aguilar, Carlos Vidaurre, Isidorro
the level of subsidies and cross-subsi- Benites, Maria Ester Inca, and Lucho Casteñedas.
dies required to sustain services. ABC
Mr. Greg Haladay contributed to the design of this operational
also opens up opportunities for cost
investigation. Technical input and feedback were provided by
savings through quality improvement of
Edward Kelley, Paula Tavrow, and Bart Burkhalter, QAP;
service delivery through the redesign or
Barbara Janowitz, Family Health International; and David Bishai,
reduction of non-value-added activities
Johns Hopkins School of Public Health, Department of
and the identification of areas with po-
International Health.
tential process inefficiencies.

Conclusions
Applying ABC to healthcare services in Recommended citation
a developing-country setting is both
Waters, H., H. Abdallah, D. Santillán, and P. Richardson. 2000.
feasible and useful. The ABC analysis
Application of activity-based costing (ABC) in a Peruvian NGO
shows where an organization is
healthcare system. Operations Research Results 1(3). Published
spending its money, the difference
for the U.S. Agency for International Development (USAID) by the
between production costs and
Quality Assurance Project (QAP): Bethesda, Maryland.
support costs, and which costs are
value-added and non-value-added.

A potential constraint in the develop- About this series

ing world is the generally poor
availability and organization of a The Operations Research Results series presents the results of
healthcare system’s cost information. QAP country or area research to encourage discussion and
To conduct ABC efficiently, cost comment within the international development community. If you
information must first be organized would like to obtain the full research report with the relevant data
both by cost category and depart- collection instruments, please contact qapdissem@urc-chs.com.
ment. The greatest benefits will then
derive from systematically using the
ABC methodology twice a year to
monitor improvements and provide
feedback to management.

Keywords
activity-based cost analysis, applica-
tion of; cost and quality management;
value-added; non-value-added; cost
analysis in developing countries; unit
costs; hospital costing; pricing of
healthcare services.
 Application of Activity-Based
Costing (ABC) in a Peruvian
NGO Healthcare System
Hugh Waters, Hany Abdallah, Diana Santillán, and Paul Richardson

founded in 1994 under the the

Strengthening Health Institutions
Project/Northern Component, funded
by the U.S. Agency for International
Development, to provide high-quality,
I. Introduction affordable healthcare.1 The organiza-
tion is located in a northern coastal
Activity-based costing (ABC) is a province with a population of approxi-
dynamic approach to determining mately 730,000.
costs by assigning them to the
At the time of the study, MaxSalud
principal activities performed within an
was made up of: (a) a management
organization. Widely applied in various
support unit (MSU), which provides
manufacturing industries, it is not
Departments in the oversight and technical assistance to
entirely new in the healthcare field.
its two clinics and houses the
MaxSalud Study Many U.S. hospitals and health
system’s medical laboratory; (b) a
organizations have explored and used
Balta Clinic: Ambulatory Consulta- health clinic in Balta; and (c) a health
ABC to improve resource manage-
tion; Dentistry, Preventive and clinic in Urrunaga. The system has
ment (Player 1998; Canby 1995;
Promotional Programs; Emergency since added two clinics to the
Dowless 1997). Some analyses of
Department; Admissions; General network. The Balta Clinic, situated in a
health services in developing countries
Services; Pharmacy; and Community busy, commercial area of Chiclayo’s
have used components of ABC (Levin
Participation and Social Work. downtown, serves a community of
et. al, 1999). Even in the United
approximately 12,500 people. The
Urrunaga Clinic: Ambulatory States, however, ABC can be time
Urrunaga Clinic serves a lower-income
Consultation; Dentistry; Preventive consuming and complex, with costs
population of 7,500 and is located in a
and Promotional Programs; Emer- potentially outweighing benefits (Chan
peri-urban, marginal community; it is
gency Services; Admissions; General 1993).
open only half a day each day.
Services; Pharmacy; and Community The purpose of this study was to Urrunaga services are similar to those
Participation and Social Work. determine the feasibility and benefit of in Balta, except that Urranaga offers
MSU: Laboratory; Community ABC’s use by a healthcare provider in only limited emergency services and
Participation; Training; Information a developing country. The respon- does not offer pediatrics and gynecol-
Services; Health Education and dents were managers at the MaxSalud ogy at all. However, Urrunaga does
Promotion; Administration and Institute for High Quality Health Care, engage in more community outreach
Finances; and Technical Health a private, nonprofit organization in and health promotion activities than
Services. Chiclayo, Peru. MaxSalud was Balta.

1 The project was implemented by University Research Co., LLC (URC) and Clapp & Mayne.

Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System ■ 1

A. Activity-Based Costing low-volume ones (Chan 1993).4 ABC Step 2, Activity analysis: Through
Versus Traditional Costing more logically attributes indirect costs interviews with MaxSalud personnel,
to the product or service that actually defining the principal activities of
ABC differs from traditional accounting consumes these costs (Cokins 1996). personnel in each department and
approaches in that it allocates, or This approach, states Brimson (1991), then determining the distribution of
traces, indirect costs to products and enables an organization to “use its their time among these activities
services by first defining the main resources in the best possible way to (West, Hicks, and Balas␣ 1996). In this
activities on which personnel in an achieve its objectives” by also way, 107 activities were defined for all
organization spend their time. ABC providing insights into the production of MaxSalud, many shared across
considers primary activities as the process for delivering products and departments by different employees;
main functions performed by a services. some were primary and some were
department or an organization. In the secondary. Note that an activity is not
analysis discussed here, these inherently “primary” or “secondary”
activities are also known as “produc-
tion activities” when they perform
II. Methodology but can vary according to the unit
where it is performed. For example,
services or produce products. 2 In The methodology of this study “creating an ad” is a primary activity in
general, the ABC procedure: comprised two phases. The first the Preventive and Promotional
1. Defines the main activities on which phase involved developing and Programs Department but a second-
personnel in an organization spend implementing an ABC model using ary activity in the Community Partici-
their time specialized software and collecting pation and Social Work Department.
data through interviews with key Similarly, providing an administrative
2. Traces the cost of financial and personnel to help investigators track service is a primary activity in the MSU
human resources to these activities costs by activity. The second phase but a secondary activity in most other
3. Traces secondary activities (related was an evaluation of the feasibility and departments.
to support and administrative usability of the model gleaned from
Value-added activities (required to
activities) to the primary activities focus groups of and interviews with
fulfill both in-house client requirements
they serve3 key personnel.
and those of clients seeking health
4. Groups these activities by service The major steps taken to implement services) and non-value-added
ABC were as follows: activities (those that were unproduc-
Traditional costing procedures often tive because of redundancy, down-
group indirect, support costs in one Step 1, Planning: Reviewing the
time, or avoidable errors) were also
pool and then allocate them to existing accounting system, assessing
identified.
products and services based on the availability of cost and other
related production figures. But when pertinent data, and determining Step 3, Activity accounting:
economies of scale come into play, additional data needs. A MaxSalud Working with the cost and accounting
this approach tends to attribute too ABC Implementation Team defined the information available from MaxSalud,
high a cost to high-volume products departments, time frame, and services unit costs were calculated by dividing
and services and too low a cost to to be costed. the total costs of the primary activity

2 The only products the clinics provide are those sold in their pharmacies. MaxSalud pays for these items and then sells them to healthcare
clients, generating some revenue in the process. Thus, in this study, the associated costs of these products were treated as pass-through costs
and are not included in the analyses.
3 For example, the unit cost of a dental consultation includes not just the cost of the dentist’s time and the equipment and materials consumed,
but also overhead costs (such as electricity and administrative support) and support activities (such as cleaning and equipping the consultation
room).
4 A simple example: Imagine a company that produces 900 blue cars and 100 red cars each year. Traditional accounting procedures would
assign 90 percent of the overhead costs to the blue cars. ABC, however, might find that blue cars consume only 60 percent of the company’s
personnel time because red cars are more specialized and fewer are produced. ABC, therefore, would assign only 60 percent of the costs
related to supporting personnel to the blue cars, thereby showing a more accurate unit cost for both blue and red cars.

2 ■ Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System

by the corresponding production Table 1
figure, obtained from MaxSalud’s
Unit Costs of Selected Services in Balta and Urrunaga
information system. Figures for
services with no price, such as June 1, 1997–May 31, 1998
vaccinations, were calculated from (Version 2)
clinic records.
Unit Costs (in U.S. dollars)
Cost analyses included some prelimi- Service Balta Urrunaga
nary assessment of how the data can
be used to improve pricing of fees, Ambulatory Services
subsidization, and efficiency. General medical consultation 8.16 13.40
Gynecology consultation 8.57 n/a
Four different versions of the costs of Pediatric consultation 8.16 n/a
MaxSalud were also assessed, each
resulting in different unit-cost esti- Preventive Services
mates. Women’s health consultation 2.77 3.51
Healthy child consultation 2.54 4.02
Version 1:MaxSalud expenditures Immunization 1.44 1.30
for its management support unit and
two clinics and expenditures made Emergency Services
with external donor assistance (i.e., full Consultation 7.09 16.54
costs) Observation of patient (6 hours) 16.00 n/a
Delivery of baby 187.30 n/a
Version 2:MaxSalud expenditures
for its management support unit and Dental Services
two clinics, excluding those made with Root canal 37.04 n/a
external donor assistance Complex dental caries 6.69 18.79
Dental consultation 3.64 50.57
Version 3:MaxSalud expenditures, Simple dental caries 9.49 18.15
excluding those of the MSU Simple dental extraction 4.01 11.80
Version 4:Operational, or recurrent, Dental cleaning 13.27 17.72
expenditures of the clinics alone Complex dental extraction 167.60 n/a

Version 2 served as the best tool for

planning; it is the one most applicable of two clinics since the study was healthcare services in MaxSalud
to calculating the actual costs as the completed points up the potential during the study period. Consistent
organization becomes independent of significance of the costs measured in with its lower volume of users, unit
external donor assistance. this study, namely, that unit costs costs were generally considerably
probably have now decreased owing higher in Urrunaga than Balta. On the
to economies of scale that result from other hand, Urrunaga was able to
III. Results spreading the overhead cost over a produce a lower unit cost for immuni-
larger base. zations, primarily due to a larger
Data collection took place during the volume of patients for this service.
period when El Niño struck, reducing
the buying power of people, especially Figure 1 and Table 2 show a break-
in Urrunaga. Since May 1998, after
A. Determination of Unit down of the unit cost of a delivery in
the period of analysis for the study, Costs the Balta Clinic in the same time
utilization rates have increased Table 1 shows unit costs for selected frame. More than one-third (35
substantially. Therefore, unit costs services for the period of this study. percent) of the cost consisted of the
reported in this paper are likely to be Because the cost of all secondary overhead charge for MSU services. A
higher than the costs that MaxSalud is activities is included in the unit costs, little less than one-fourth (23 percent)
currently incurring, especially with four the table accounts for all resources was directly related to providing the
clinics now in operation. The addition used to produce and support service itself (the primary activity),

Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System ■ 3

including the cost of personnel, Table 2
medical supplies, rent, and mainte- Breakdown of Primary Activity and Secondary Activities
nance and depreciation of the
Associated with Performing a Delivery and Providing Related
equipment and supplies.
Services in Balta Clinic, June 1, 1997–May 31, 1998
Forty-two percent went to secondary
(Version 2)
activities, performed directly or
indirectly to prepare for carrying out Expense Category of Primary Percent of Secondary Percent of
the delivery (i.e., the indirect cost of Activity (Delivering a Baby) Total Cost Activity Total Cost
admissions and the proportional costs
Personnel 75 Waiting time 59
of directly related support services
Depreciation 12 Neonatal monitoring 13
such as supervision, administration,
Maintenance 5 Training 11
and cleaning). More than half of the
Rent 4 Meetings 7
secondary costs were incurred by
Medical supplies 1 Birth package preparation 7
personnel-waiting time. This high
Other 3 Nursing support 2
proportion was due, in part, to
Patient evaluation 1
deliveries taking place in Balta’s
Maintaining records 0*
Emergency Department. This depart-
ment requires the presence of Total 100 Total 100
personnel for night shifts regardless of *Zero due to rounding
patient load. Personnel-waiting costs
could likely be reduced with a
consequent beneficial impact on the
Figure 1
unit cost of a delivery.
Breakdown of the Cost of a Delivery at Balta Clinic
In general, unit costs for delivery and
general ambulatory consultations at
June 1, 1997–May 31, 1998
both clinics were relatively high,
particularly in comparison with the low
fees being charged to a clientele that
includes the middle and lower-middle Total unit cost = $187.30
classes of the Chiclayo area. At Balta, 23%
for example, the full package of 1% MSU
35%
delivery services, including perinatal Primary activity
care, cost $187.30, of which only 24 Balta admission
percent was defrayed by the corre-
18% Balta general services
sponding fee. Other secondary activities
23%
B. Pricing and Calculation
of Subsidies
Table 3 shows the unit costs calcu-
lated for a variety of selected services,
together with the fees charged to subsidization. In the dentistry depart- revenue was not enough to cross-
clients for these services and the gap ment, the Balta Clinic seemed to subsidize losses in other departments
between the unit cost and the unit fee. generate some net revenue on some of the clinics. Using the ABC data on
Specific services that carry positive services (e.g., root canals and cross-subsidization and revenue-
externalities—immunizations, for complex dental caries) adequate to losing services, managers can adjust
example, that benefit other people in offset the negative revenue in other existing fees and the overall fee
addition to the person being treated— services in that department. However, strategy.
are the ones most likely to require the revenue from the areas with net

4 ■ Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System

 Table 3
Comparison of Unit Costs and Fees for Services in Balta and Urrunaga
June 1, 1997–May 31, 1998 (in U.S. Dollars)
(Version 2)

Balta Urrunaga
Number Number
Unit of Paying Unit of Paying
Selected Services Cost Fee Difference Clients Cost Fee Difference Clients

Ambulatory Services
General medical consultation 8.16 5.50 (2.66) 7,963 13.40 2.39 (11.01) 4,054
Gynecology consultation 8.57 7.35 (1.22) 2,040 n/a n/a n/a —
Pediatric consultation 8.16 7.35 (0.81) 2,201 n/a n/a n/a —
Net revenue (loss) in service area ($25,453) ($44,634)

Dentistry
Root canal 37.04 49.30 12.26 105 n/a n/a n/a —
Complex dental caries 6.69 12.03 5.34 1,110 18.79 6.99 (10.19) 113
Dental consultation 3.64 2.20 (1.44) 1,716 50.57 1.49 (49.08) 25
Simple dental caries 9.49 8.94 (0.55) 1,296 18.15 5.97 (12.18) 154
Simple dental extraction 4.01 4.19 0.18 1,022 11.80 3.97 (7.83) 592
Dental cleaning 13.27 7.35 (5.92) 308 17.72 5.50 (12.72) 20
Complex dental extraction 167.60 9.19 (158.41) 7 n/a n/a n/a —
Net revenue (loss) in service area ($1,283) ($9,144)

Preventive Care
Women’s health consultation 2.77 3.68 0.91 2,521 3.51 1.84 (1.67) 2,346
Healthy child consultation 2.54 1.47 (1.07) 3,689 4.02 0.92 (3.10) 1,641
Immunization 1.44 Free (1.44) 3,889 1.30 Free (1.30) 7,014
Net revenue (loss) in service area ($7,253) ($18,123)

Emergency Services
Emergency consultation 7.09 7.35 0.26 4,158 16.54 4.40 (12.14) 242
Transport of patient 34.45 27.57 (6.88) 223 n/a n/a n/a —
Observation of patient (6 hours) 16.00 4.40 (11.60) 354 n/a n/a n/a —
Delivery 187.30 45.11 (142.19) 268 n/a n/a n/a —
Net revenue (loss) in service area ($42,666) ($2,938)

Community Participation
Community participation visit 4 Free (4) 2,111 5.08 Free (5.08) 2,739
Net revenue (loss) in service area ($8,444) ($13,914)
OVERALL NET REVENUE ($82,534) ($88,754)

Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System ■ 5

Sensitivity analysis can be performed Table 4
on unit costs of services determined
Services with High Non-Value-Added Costs
by ABC. By applying varying scenarios
of client flow and using different cost June 1, 1997–May 31, 1998
versions, managers can project the (Percentage of Total Service Cost)
need for future subsidies. For instance,
Balta Urrunaga
using Version 4 (i.e., only operational
costs of clinics), the equivalent subsidy Service Non-Value-Added Cost Service Non-Value-Added Cost
level required to support the services Emergency 18.8 Ambulatory consultation 12.5
in Table 3 is about $21,420 for Balta
Dentistry 18.3 Pharmacy 7.3
and $38,550 for Urrunaga.
Ambulatory consultation 9.1 Dentistry 5.8
General services 6.9 General services 5.2
C. Analysis of Non-Value-
Added Activities
Table 5
Overall, non-value-added activities
represented a relatively small propor- Services with Highest Secondary Costs
tion of total costs at MaxSalud, varying June 1, 1997–May 31, 1998
from 5.6 percent under Version 1 (full (Percentage of Total Service Cost)
cost) to 9.0 percent under Version 4
(operational cost only). These figures Balta Urrunaga
are equal to approximately $27,000 Service Secondary Costs Service Secondary Costs
and $35,800, respectively, over the
course of the study period. Overall, Emergency 87.7 Pharmacy 82.0
non-value added activities accounted Pharmacy 86.7 Community Participation 78.5
for a higher proportion of total costs in Admissions 85.6 Dentistry 75.2
Balta than in Urrunaga (10.6 percent
General services 63.9 General services 64.8
of total costs versus 6.0 percent under
Version 2), in part owing to the
relatively high level of non-value-added
costs in Balta associated with provid- D. Analysis of Secondary providing training, and handling
Activities general administration) because of the
ing emergency services (Table 4). The
wide range of services it offers. In
ideal level for non-value-added costs Table 5 shows that 87 percent of the contrast, the laboratory department
is, of course, 0 percent of operations total costs in the emergency depart- focuses almost solely on performing
cost, an unrealistic number in many ment in the Balta Clinic are attribut- lab exams, so most of its activities are
organizations. A reasonable level for able to secondary activities. Compare by nature primary.
organizations in the service industry is this with the laboratory department’s
about 2–3 percent (Pryor and Sahm secondary costs of only 6 percent. However, the laboratory department
1998). Such differences can be interpreted as support costs probably could be even
differences in levels of process lower. Figure 2 shows that repeating
Note that non-value-added costs were
efficiency, with one strong caveat: exams and waiting time, examples of
most likely underestimated because
secondary costs are necessary for the non-value-added activities, account
personnel are unlikely to admit
proper functioning of a department, for more than one-fourth of secondary
spending a significant portion of their
and the optimal level of secondary costs. Repetition of exams is due to
time either redoing activities or doing
costs depends on the work of the human error that, in principle, could
nothing. This problem is inherent in the
department. The emergency depart- be reduced; waiting time is frequently
ABC methodology, whether informa-
ment requires staff to be there, busy due to inefficiencies in the flow of
tion is gathered through interviews or
or not. Moreover, it needs a complex patients and materials and assignment
directly through observation of
structure of support activities (e.g., of staff.
personnel.
preparing materials and rooms,

6 ■ Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System

 F. Projections and
Figure 2 Simulations
Secondary Laboratory Activities Once all of the cost and activity data
June 1, 1997–May 31, 1998 are available and organized, ABC can
be used to carry out a variety of
simulations assessing the effect of
100% = $33,420 expected changes in the organization.
9% For example, additional staff for
specific positions can be added to the
Prepare room
18% 34%
analysis, and service utilization rates
Training can be adjusted based on expected
Registration changes in rates. ABC can also
Prepare Materials calculate new unit costs under revised
15% Repeat exams assumptions, and recalculate second-
Waiting for samples ary to primary ratios and value-added
12% to non-value-added ratios.
12%

G. Requirements for
Implementing ABC
Among the most important require-
E. Standard Cost Analysis large part due to the different menus ments for implementing ABC are: (a)
of services. In Balta, the largest share access to both data and to personnel
Some of the traditional cost analyses
of costs (31 percent) was generated and (b) complementary accounting
conducted with financial data are also
by the emergency department, and management information sys-
possible using ABC. ABC, for ex-
representing 14 percent of Balta’s tems. Assuring clinical staff that the
ample, clearly records total costs for
client base. Ambulatory consultation activity interviews, which took from
the whole organization that can be
(including pediatric, gynecological, one to two hours, were in no way
compared with total revenues to
and general medical consultation) was related to an evaluation of perfor-
determine the overall financial status
the second highest cost generator in mance proved to be an important
of the company. For MaxSalud, total
Balta (20 percent) and the highest in factor in getting information. Obtaining
costs for the one-year period were
Urrunaga (26 percent). information concerning time spent on
$299,000 (Version 1), $535,000
non-value-added activities was
(Version 2), $334,000 (Version 3), One significant cost center in
nonetheless difficult because staff are
and $640,000 (Version 4). The Urrunaga was community participa-
typically reluctant to suggest that they
organization’s total costs can also be tion, which represented 12 percent of
spend substantial time on non-value-
reported by cost category and by costs, more than twice that in Balta (5
added activities. Consequently, figures
department. percent). This finding reflects the
obtained for non-value-added costs
greater emphasis placed on commu-
Cost by cost categor y. In all are probable underestimations of the
nity participation in Urrunaga. How-
versions, human resource costs real costs. Alternative approaches for
ever, because community participation
represented the most significant analyzing activities—such as time
does not generate revenue directly, its
category of costs. Salaries and other studies and focus groups—could be
costs must be covered by a separate
personnel costs varied from 70 explored (Player and Keys 1995).
source of funding or revenue. (Costs
percent of total costs under Version 1
associated with community participa- ABC needs production and utilization
to 84 percent under Version 4.
tion may be considered investments in information on the services to be
Cost by depar tments.Generally, future clients seeking healthcare costed. These figures are the denomi-
the division of costs by department services, thereby generating future nators for the unit-cost calculations at
was quite different in the two clinics, in revenue streams to the clinic.) MaxSalud. Production figures for paid

Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System ■ 7

services, representing the number and some non-value-added activities. quality of the service, such as
type of health services rendered, were Prices can and should be adjusted in established standards, ABC can track
available through the cashier’s register. light of this information. services both correctly and incorrectly
Receipts from the cashier’s register performed and determine correspond-
Additionally, ABC can calculate the
also captured the number of dis- ing unit costs. Alternatively, ABC
overall subsidy required by a nonprofit
counted or subsidized and exonerated analysis can be applied before and
organization. By using versions with
services.5 The only production figures after implementation of a QI program.
different cost assumptions, ABC can
unavailable at MaxSalud related to The results will show the cost of
project subsidies needed for commu-
communications and community performing services—both including
nity services such as outreach and
extension services. and excluding the QI costs—thus
health promotion.
providing a direct comparison of the
Once the basic information system is
Alternative approaches for analyzing costs and cost benefits of the
in place and is being maintained, the
the activities performed in an organi- program.
level of resources required to repeat
ABC periodically can be reduced zation can be explored, specifically to Another potential application of ABC
significantly. 6 It is entirely feasible, for increase the reliability of estimates of to the health sector in developing
example, to carry out a more simpli- non-value-added time spent by countries is to arrive at the potential
fied version of the ABC methodology, personnel. Options include time- cost of expanding public and private
using spreadsheets rather than motion studies or focus groups (Player health insurance coverage based on a
specialized software and making and Keys 1995). capitation system. As countries
assumptions to account for limited ABC has several applications. It allows struggle with ways to expand cover-
data (Holmes and Schroeder 1996). managers to measure the effective- age while making health systems
ness and financial impact of quality more efficient, the ability to calculate
improvement (QI) programs and and predict such costs is essential.
IV. Conclusions and compare these against their costs
Discussion (Stiles and Mick 1997). One simple
way is to compare the unit-cost
This study clearly shows that ABC differential between a health care
calculates real unit costs by including service performed in compliance with
support and administrative costs in quality standards and the same
the unit-cost information. It also service performed poorly. Using some
reveals hidden costs associated with type of external verification of the

5 Another potential source of production information would be the provider’s register, which captures the number of services rendered by a
provider, including free follow-up consultations.
6 To maintain ABC at MaxSalud, key personnel will require training in the ABC methodology and software. Practical guides for the implementation
of ABC management are Brimson 1991; Kaplan and Cooper 1998; Pryor and Sahm 1998; O’Guin 1991; and Storfjell and Jessup 1996.

8 ■ Application of Activity-Based Costing (ABC) in a Peruvian NGO Healthcare System

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