What is a primary benefit of activity-based costing in healthcare?

• A. More accurate costing of services by tracing costs to activities; helps pricing and optimization decisions.
• B. Reduces all costs to fixed amounts.
• C. Reallocates costs randomly.
• D. Eliminates overhead.

Answer: (A)

Activity-based costing builds cost information around the actual activities that drive resource use in care delivery. By tracing costs to specific activities (like imaging, consultations, or procedure steps) and then allocating those costs to services based on how much each activity is used, you get a much clearer picture of what each service truly costs. This leads to more accurate pricing, better budgeting, and targeted process improvements because you can see which activities are driving costs and where inefficiencies lie.

Other approaches that spread overhead evenly or assign costs randomly fail to reflect how different services actually consume resources, and the idea of eliminating overhead isn’t realistic—overhead is real, it’s just better allocated with activity-based methods.