What is activity-based costing (ABC) in healthcare?

• A. ABC traces costs to departments without considering activities.
• B. ABC assigns costs based on patient volume.
• C. ABC traces costs to activities that consume resources (e.g., imaging, surgery), leading to more accurate costing of services and better pricing and optimization decisions.
• D. ABC eliminates all overhead costs.

Answer: (C)

Activity-based costing in healthcare identifies costs by tracing them to the activities that consume resources, such as imaging, surgery, labs, or patient transport. It uses cost drivers to assign overhead and support costs to the exact activities that generate them, then assigns those activity costs to the services that require those activities. This yields more accurate costing for each service, enabling better pricing decisions and opportunities to optimize processes. For example, if a procedure routinely uses expensive imaging, the imaging activity’s costs are allocated to that procedure, rather than spreading overhead evenly across departments. Traditional costing methods that allocate costs by department or by patient volume can misrepresent true resource use, while ABC reallocates costs to the activities that drive them; it does not eliminate overhead.