Activity–based costing for a non–profit organisation

Abstract

The business environment of today has become more dynamic and unpredictable, where managers are being asked to cut costs while maintaining or even increasing the service quality in a very short period. If management wants accurate costs of services, a more sophisticated understanding of activities and their cost drivers is required due to the high proportion of overhead costs. Overhead costs are inevitable especially in a predominantly service–oriented organisation. In this modern age, ABC appears to be the contemporary costing system that could provide possible solutions in dealing with these escalating overhead costs. The primary objective of this analysis was to develop and implement an activity–based costing model for the South African Pharmacy Council. The secondary objectives of this analysis were to investigate the optimal costing and pricing of the services produced; provide a service–costing framework through an ABC system; analyse the service and customer profitability; and to make recommendations about potential overhead costs reduction points within the department based on the results of the ABC analysis. Data required to conduct the analysis was obtained from the organisation’s Quality Management System, dashboard processes document, financial records and the procurement records. The minimum amount of times required to complete activities were estimated based on the experience, direct observation, and informal interviewing of the personnel involved with the activity. The internship programme consumed the most financial resources (70.6%) allocated to the department. Negative contribution margins were experienced with respect to the provision of the internship programme. The activities associated with portfolio assessment and the conducting of internship workshops are consuming a considerable amount of resources allocated to the provision of the internship. These activities are the major cost drivers in the provision of the internship programme.