#2924 - Topic 4 Reading Target Costing In The Nhs (Cima) - Accounting in the New Public Sector

Payment by Results and the introduction of a national tariff have only added to existing pressure on the NHS

The media is continually scrutinizing the mixed financial performance of NHS Trusts which continues despite significant increases in funding

Target costing in the NHS presents an opportunity to radically improve the operational delivery of patient care

Target costing originated in the Japanese manufacturing industry in the 1970s as a response to the challenges posed by consumer demand for more diversity and shorter product life cycles

Establishment of targets for market price, volume and profit, from which a target production cost is derived

Cost analysis is carried out to determine an actual cost and identify the extent of, and develop plans for, the cost reduction required to target cost

Real strength of target costing is an overall framework for cost improvement and efficiency within which a range of different techniques for analysis and re-engineering are used

CIMA’s NHS Working Group focuses on developing guidance to raise the standards of financial management, specifically in areas where better approaches to management accounting can make a significant difference to performance

A target cost is a product cost estimate derived by subtracting a desired profit margin from a competitive market price

Sakurai (1989) defines target costing as a ‘cost management tool for reducing the overall cost of a product over its entire life cycle with the help of the production, engineering, R&D and accounting departments’

Literature reveals that target costing is not seen as a technique for cost control but a management process (Cooper and Chew, 1996)

A process of negotiation between different production departments and between the company and its suppliers to arrive at final target costs for the individuals components

• This could be an important advantage for marketization of the NHS

Sakurai (1989) – target costing as a system for reducing cost and promoting the use of cost-engineering tools such as those listed above

To reduce costs before they are locked in

To control design specifications and production techniques

• Tends to be oriented more towards management and engineering than accounting, and to be successful requires the use of cost engineering techniques such as value engineering (Sakurai, 1989)

As an analysis which highlights other problems

As a driver for cost improvement

To encourage a focus on the customer

Focus on the customer

Emphasis on cost reduction at early stages in product development

Consideration of the whole product life-cycle

A multidisciplinary process

Team members understand their role and how it impacts costs

Involvement of the whole value/supply chain

An interactive process

Specific and real targets for improvement

Cooper and Chew (1996) identify ways in which target costing can be applied to service-oriented businesses

The key issues are still relevant

Focus on the impact of new services on the whole system

The need for improved financial management in the NHS

• The joint report published in June 2005 by the National Audit Office and the Audit Commission identified the need for improvements in financial skills and systems to meet the challenges facing the health service

• Unprecedented level of pressure on the NHS financial regime, due to the combined effect of increased annual expenditure, structural reform, new staff contracts, developments in IT and changes to funding

Payment by results

• This is the development which most directly suggests that target costing could be of use to the NHS

Current use of target costing in the NHS

• Literature concerning the use of target costing in the NHS is very limited

• Does not appear that it is used in many health care organizations

• Jackson and Lapsley (2003) found that 6% of those in the health service in Scotland were using target costing

The development of financial management in the NHS

• Emphasis on value for money supported by performance measurement, budgeting and costing techniques (Jackson and Lapsley, 2003)

• They found there was little experimentation with accounting techniques in the public sector, possibly because there has been so much change in accounting systems in recent years that finance managers have not had time to do so

  • Another possible explanation is the persistent increase in NHS budgets so there hasn't really been much direct downward pressure on costs

  • Only when times are tough do most businesses really lock at cost effectiveness

• There is a key role to be played by professional bodies in providing the support to financial managers in implementing new systems

Difficulties in defining the product...