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Management Control Systems

Notes Self Assessment

Fill in the blanks:
9. A ……………………. is one that is chartered to operate in the interests of the society.
10. Most government organizations are public supported; they obtain their revenues from
the .............................. .

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Case Study MediTech Hospital

editech Hospital is a 250 bed tertiary care hospital specializing in the treatment
of many forms of cancer. Founded in 1950 as a centre for the treatment of
Mtuberculosis patients, it has evolved into a major research and treatment
institution. Many experimental therapies have been pioneered at Meditech Hospital.
Patients with advanced diseases who did not find treatment anywhere else were treated
here. From its inception until 1970, Meditech hospital was a charitable institution, providing
care to patients free of charge. In 1970, as the hospital authorities felt that the funds they
received were insufficient, they began to bill patients.
In order to bring professional management practices to the hospital operations, the staff
decided to develop sound cost accounting and control procedures. Traditionally, hospitals
have done little or no cost accounting. In the past, cost reimbursement was based upon
“actual costs incurred” for patients. The government’s policy to set different reimbursement
levels for different diagnosis categories based on the severity of the diagnosis had resulted
in tremendous pressure on hospitals., including Meditech Hospital, to determine their
“true” cost for each relevant diagnosis category, so that costs could be reduced below the
reimbursement level in order to provide subsidies for those services in which costs could
not be reduced.
Meditech hired a cost accounting manager to install a new cost accounting system that
could be used for budgeting and cost control at the hospital. The cost accounting manager
identified the top revenue-producing procedures. He interviewed each departmental head
and related technicians to determine the actual costs of each procedure performed in the
department. Also the amount of time each employee spent on given task was identified
with the help of questionnaire. The process was repeated for the medical group.
The cost data developed as per this procedure were then used to develop the annual
operating budget. Each departmental head was expected to forecast a volume of procedures
for the next year. Besides the actual volume of procedures, case mix (kinds of patents) was
also forecasted by each department head. Here departments estimated the kinds of patients
they are expected to treat over the next year. A standard treatment plan was prepared in
order to identify what it took to treat an average patient with a given disease. On this
basis, an approximate treatment cost to the hospital for a particular diagnosis and therapy
was developed. In this way the hospital could gain insight into which procedures were
more cost-effective as well as the costs of treating specific diseases.
Departmental managers did not like the cost accounting manager and tried to avoid him
as they felt that the cost accounting manager was confronting them with problems which
were outside their areas of competence. Further, they felt that budgeting was not directly
related to the mission of the organization, which was to provide the highest-quality
Contd...

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