Towards A strategic management accounting, Framework for Cost Management in Egyptian Healthcare Industry

Abstract

The purpose of this paper is to examine the contribution of strategic management accounting (SMA) to the healthcare industry performance. Although academicians and practitioners believe the implementation of SMA and its techniques are superior to traditional forms of management accounting, it is noted that the adoption of SMA has not been used commonly among healthcare organizations except on a very narrow scale as it is illustrated within the context of the research. This paper first explains the need for managing organizations strategically and the meaning of SMA followed by a presentation of the cost process in healthcare organizations. Secondly, the paper describes the implementation of SMA in the healthcare industry, in order to enhance the hospitals performance and cost management. Another contribution of this paper is that it suggests practical guide for selecting the management accounting techniques for healthcare organizations. The findings showed that the application of SMA is enhancing the quality of the accounting information presented by the costing system, and the quality of the decision-making process in healthcare industry. The paper included a detailed description and analysis of research findings based on extensive survey of healthcare organizations in Egypt.

Full text

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Towards A strategic management accounting, Framework for Cost Management in
Egyptian Healthcare Industry
Mohamed S. El-Deeb, Ph.D. Modern Sciences and Arts University, Egypt
Moh.eldeeb2@hotmail.com, msamy@msa.eun.eg
• El Deeb, M. S (2012) “Towards A strategic management accounting,
Framework for Cost Management in Egyptian Healthcare Industry”,
Egyptian Accounting Review, Cairo University, Faculty of Commerce.,
Issue No.2-year 2, ISSN: 2314-5196.

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ABSTRACT
The purpose of this paper is to examine the contribution of strategic management accounting
(SMA) to the healthcare industry performance. Although academicians and practitioners believe
the implementation of SMA and its techniques are superior to traditional forms of management
accounting, it is noted that the adoption of SMA has not been used commonly among healthcare
organizations except on a very narrow scale as it is illustrated within the context of the research.
This paper first explains the need for managing organizations strategically and the meaning of
SMA followed by a presentation of the cost process in healthcare organizations. Secondly, the
paper describes the implementation of SMA in the healthcare industry, in order to enhance the
hospitals performance and cost management. Another contribution of this paper is that it
suggests practical guide for selecting the management accounting techniques for healthcare
organizations. The findings showed that the application of SMA is enhancing the quality of the
accounting information presented by the costing system, and the quality of the decision-making
process in healthcare industry. The paper included a detailed description and analysis of research
findings based on extensive survey of healthcare organizations in Egypt.
RESEARCH LIMITATIONS
The results of the research based on a limited survey that has been distributed to 14 hospitals in,
Great Cairo, Egypt. The research was targeting hundred managers. It is recognized that further
research is necessary to establish the exact nature of the causal linkages between proposed
application of strategic management techniques on healthcare and the enhanced performance of
these organizations in order to gain insights into practice elsewhere.
KEY WORDS
Strategic Management Accounting, Performance Evaluation, Healthcare Industry, Financial
Measures, Non-financial measures
RESEARCH PROBLEMS
The problems that face most of the healthcare organizations are how to enhance its performance
and decrease its cost in the same time. This can be achieved through relating the financial and the
non-financial measures within the context of the SMA techniques. The research questions are:
a. Do SMA techniques enhance the accuracy and reliability of financial data?
b. Do SMA techniques improve the quality of decision-making process regarding financial
and non-financial issues?
c. What is the most appropriate SMA technique to enhance performance and cost
management in Egyptian healthcare industry?

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RESEARCH OBJECTIVES
The objectives of the study are as follows:
a. Enhancing the accuracy and reliability of financial data by using the strategic
management accounting techniques in healthcare industry.
b. Improving the quality of decision-making process regarding financial and non-financial
issues.
c. Enhancing the performance and cost management in the Egyptian healthcare industry.
RESEARCH HYPOTHESES
a. Strategic management accounting techniques enhance the accuracy and reliability of
financial data in healthcare industry.
b. Strategic management accounting techniques improve the quality of decision-making
process regarding financial and non-financial issues.
c. ABC costing system, and standard costing are the most appropriate SMA techniques to
enhance performance and cost management in Egyptian healthcare industry
INTRODUCTION
Today's business environment is often described as stormy, complex, aggressive and highly
competitive. The healthcare industry, being an integral part of it, has not escaped from this
dynamic business environment. Often thought in the past as old, reliable and predictable
businesses, it is now characterized by intense competition, constant changes, and a relatively
high incidence of failure. It has become clear that the issue at stake is not only firms' survival,
but also its profitability (Kathy Qualls, 2012).
The development of costing theories, combined with advances in information technology, has
improved the theoretical abilities of such systems. However, two questions remain largely
unanswered: a) whether these theories lead to tangible improvements; and b) what are the
variables that drive the success of cost accounting systems (Agarwal, et al. 2010).
Despite being introduced into the literature over 20 years ago, there is still little or no agreement
about what constitutes strategic management accounting (SMA). The term itself is open to a
number of interpretations, something that is reflected in the varied nature of the research
associated with it; however, SMA is best understood as a generic approach to accounting for
strategic positioning. It is defined by an attempt to integrate insights from management
accounting and marketing management within a strategic management framework (Robin
Roslender, Susan J. Hart, 2003).
Strategic management accounting (SMA) is a development in the accounting literature that acts
as a framework for the various strategic elements in the discipline of management accounting. It
is also a reaction primarily positive to the ‘relevance lost’ arguments in management accounting
in which writers have called for a significant rethinking of the theory and practice of
management accounting since the mid-1980s (Mejer, Carsten, 2004).

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Strategic management accounting in healthcare organizations offers an introduction to the
subject of management accounting and provides a user-oriented approach to the concepts and
techniques managers need, in order to understand management accounting in a healthcare
context. The information needed to master the basics of activity based costing, full-cost
accounting, differential cost accounting, and responsibility accounting. It describes the uses and
limitations of management accounting and the common accounting pitfalls managers face when
making routine healthcare management decisions (David W. Young, 2004).
The healthcare industry is reaching its maturity stage. This is accompanied by a trend toward
concentration, intense competition in terms of quality, price and market share, as well as further
vulnerability to environmental threats like economic downturn. Under such conditions each
increase in market share requires considerable investments. Moreover, it raises the issue of firms'
ability to survive in the healthcare business whether independently, or as candidates for takeover
attempts. All these considerations trigger the need for re-examining managerial techniques,
assumptions and philosophies. Strategic management is designed to assist organizations to deal
with present and future challenges (Nyamori, Robert, et al.2001).
This paper introduces the management accounting system for hospitals. It is a Framework used
for tracking and analyzing a health facility’s services, resources, and costs. It provides the means
for both routine management control and its useful tool for examining costs in connection with
productive efficiency. It is built around cost centers orientation. It is designed primarily for
hospitals, and it can be easily modified to suit any service organizations.
THE EVOLUTION OF STRATEGIC MANAGEMENT ACCOUNTING
The literature on SMA has expanded rapidly since its genesis in the early 1980s in the light of
the growing criticism of management accounting and budgeting (Hoffjan & Wömpener, 2006;
Fincham, & Roslender 2003). What is agreed in the literature on SMA is that there are three
general characteristics that have emerged over time. The first is the notion of an external focus;
the second is that SMA has a long term, forward looking orientation; the last is that there is now
a provision for the use of both financial and non-financial information for decision-making
purposes (Cadez & Guilding , 2007). This last development alters significantly, what was the
prevailing notion in management accounting: that accounting data or financial numbers was the
only real management tool for effective internal organizational decision-making.
The term SMA has a longer history, however, having been introduced into management
accounting some years earlier by Simmonds (1981, 1982). It was again used to identify an
externally oriented approach that entailed collecting and analyzing data on costs, prices, sales
volumes, market shares, cash flows and resource utilization, for both a business and its
competitors. What was being sought was some indication of the relative competitive position of
a business in an industry. Within this competitor position analysis framework, less importance
was placed on financial accuracy than upon deriving insights that might inform the future
strategy of a business (Fincham, & Roslender, 2003).
In reformulating SMA, Bromwich, (1994) was able to draw on a wider range of relevant insights.
Porter’s work on business strategy identified three generic strategies: cost leadership; product
differentiation; and focus, each of which had different implications for both management and

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accounting (Porter, 1980,1985). In addition, the economic theories of Lancaster, on product
attribute on contestable markets (Baumol et al., 1982), enriched the mix, something that was
evident in Bromwich’s (1990) definition of SMA as:
“The provision and analysis of financial information on the firm’s product markets and
competitors’ costs and cost structures and the monitoring of the enterprise’s strategies and those of
its competitors in these markets over a number of periods”.
At the heart of Bromwich’s SMA approach is the attribute costing technique based on a strategic
cost analysis matrix (Bromwich, 1992; Bromwich and Bhimani, 1994). The objective of attribute
costing is to cost the benefits that products provide for customers. In Bromwich’s view, is the
benefits that products provide for customers that constitute the ultimate cost drivers. This is quite
different from the reasoning underlying activity-based costing where it is the costs of the
activities that the product consumes that are seen to drive the costs of products.
To understand the benefits sought by SMA proponents it is necessary to look inside the
organization, whereas information on activities and cost drivers is available internally. Using a
strategic cost analysis it is possible to interface the set of benefit producing attributes sought by
managers with the costs associated with providing these benefits. It is important to provide these
benefits as cost effectively as possible, since only efficient institutions, each of which yield the
maximum amount of a specific bundle of benefits (Services and Products) for the minimum cost,
will survive in a well-organized market (Bromwich, 1992).
Attribute costing, therefore, constitutes an additional approach to cost management, but one that
is quite distinct from either activity-based costing or strategic cost management (Shank, 1989;
Shank and Govindarajan, 1992, 1993). Bromwich highlights this distinction identifying two
dominant approaches to strategic management accounting, one seeks to cost the product
attributes provided by a company’s products. It is these which are seen as attracting customers.
The other approach is to cost the functions in the value chain which provide value to the
customer (Bromwich and Bhimani, 1994).
What all approaches share, however, is the pursuit of cost reduction for strategic purposes
(Cooper and Kaplan, 1996; Shields and McEwen, 1996). In this way, cost management is
fundamentally different to the traditional focus of costing, i.e. the determination of the amount of
resource attributable to some cost object thought to be of interest to management.
COST MANAGEMENT APPROACHES
Cost accounting is essential to hospitals and for healthcare industry in general. Resources used in
rendering healthcare (hospital) services – as in any production effort – include labor (human
resources), material and supplies, equipment, and other assets, including buildings and land.
Knowing the quantity of resources is often an important first step in costing. Quantities of
resources can also serve as proxy variables for allocating shared costs (Kurunmaki, L., Lapsley,
I. and Melia, K., 2003).
Hospital cost accounting assigns monetary values to those resources involved in the hospital
operations. This “monetization” of resources is a way of converting a mixed bag of inputs into a

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common measure, and this greatly facilitates planning and management (Manitoba Center for
Health Policy. 2002).
The SMA approach focuses on the “production” costs of patient care – i.e., those costs that are
directly relevant to the care of patients at a hospital. Costs that may be incurred by a hospital in
its other, broader mandates, e.g., teaching and research, would only be included to the extent that
they have a bearing on patient care. There are a number of different ways to categorize
production costs (Partners for Health Reformplus Project. 2002).
Resources that are similar in nature are grouped together: “labor,” “supplies,” “equipment,”
“buildings,” and “land” are common general categories to one of which most individual
resources could be unambiguously assigned. Each of these categories can be further subdivided
(“supplies” into, for example, “pharmaceuticals,” and “office supplies”) creating the possibility
of a large number of different classification systems. Each country tends to have its own slightly
different cost breakdown usually set out in public and general accounting standards or guidelines
(Partners for Health Reformplus Project. 2002a).
The key feature of a good SMA is that it is comprehensive and non-overlapping because costs
are usually estimated over a defined one-year period, an important distinction needs to be made
between those resources which are consumed within the year (recurrent) and those which are
longer-lived (capital goods or fixed assets), (Partners for Health Reformplus Project. 2002b).
Recurrent costs include costs of labor, pharmaceuticals and medical supplies, meals, linen and
clothing, utilities (water, gas, heat, and electricity), maintenance and repair of buildings and
equipment, laundry, cleaning, office supplies, communication. Annual accounting of recurrent
costs is conceptually straightforward. Capital costs include the costs of larger office equipment
and medical equipment and vehicles that are usually incurred through a one-time payment even
though the items are used over a considerably longer period. Annual accounting requires the
transformation of this capital cost into a regular stream of equivalent annual or recurrent costs
over the life of the asset. This is done by a process called “depreciation” that estimates how
much of an asset is used up each year. An organization that annually puts aside the sum
calculated through depreciation should have enough funds by the end of the asset’s useful life to
be able to replace the worn out asset with a new one (Roslender and Hart, 2003).
There are other important ways of categorizing costs: “Direct” and “indirect,” for example, refer
to the way in which the costs have been attributed to or associated with a particular cost center.
Costs that can be easily attributed to a particular cost center are termed “direct costs.” Some
resources are shared between cost centers in a way that cannot be easily teased out. They can
only be allocated (i.e., shared out) to a particular cost center indirectly, using some kind of proxy
variable (or cost driver). Costs calculated in this way are termed “indirect costs.” The cost driver
might be a measure of resources (e.g., number of staff, area covered) or of outputs (e.g., number
of patients treated) or even of other costs (indirect costs are sometimes allocated in proportion to
direct costs), (Shank and Govindarajan, 1992, 1993).
The crucial feature of the cost driver is that it should mirror as closely as possible the amount of
activity being costed indirectly. “Direct” and “indirect” refer to the way the costs are measured.

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“Fixed” and “variable” are terms that describe how costs vary when output increases or
decreases. Costs that do not vary when output changes are termed “fixed”; those that do are
termed “variable.” These terms are sometimes confused with the categories “capital” and
“recurrent.” It is true that capital costs (involving one-off payments) are often fixed (and do not
change with levels of output). An example would be building costs. And many recurrent costs
(e.g., drug supplies) are variable. But recurrent costs can also be fixed. For example, building
maintenance and most salary costs while made routinely are relatively constant and independent
of output. Chapter 8 describes more about fixed and variable costs and the importance of the
distinction when it comes to analysis (Cleverley, 1987).
Total costs reflect the entire costs of keeping a cost center in operation. They include direct costs
– those unambiguously associated with the cost center – and a share of the assigned indirect
costs: total direct costs plus total indirect costs equal total costs. Looked at from another angle,
total costs are the sum of all capital and recurrent costs or the sum of all fixed and variable costs.
SMA draws a distinction between these total costs and what are termed full costs. Full costs are
really only relevant to so-called revenue-earning cost centers. They consist of the costs of the
(revenue-earning) cost center itself, plus the allocated share of costs of the intermediate cost
centers that precede it on the step-down allocation chart. Many different kinds of averages can
be calculated using different kinds of outputs (e.g., cost per patient visit, per patient discharge,
per patient day and per hospital bed) and different kinds of costs (Garattini et al., 1999).
Finally, there are a number of ways that costs can be put together with output variables to
generate useful information about the behavior of costs. Unit costs are costs per unit of service or
product. Two measures are used: Average cost is the total cost of production divided by the
number of units of service both measured over a specified accounting period. Average costs will
tend to fall as the amount of activity or output increases. This is because fixed costs are shared
out among more and more units. This phenomenon is called “economies of scale.” The higher
the proportion of total costs that are fixed, the more pronounced this effect will be. The average
full cost of revenue-earning centers represents the price that hospitals need to charge for their
services in order to cover all the hospital’s costs (Manitoba Center for Health Policy. 2002).
TYPES OF HEALTHCARE SERVICES
A great many different activities are going on in a functioning hospital – everything ranging
from surgical operations and antenatal classes to paying staff and cleaning the canteen. Any kind
of management accounting system will need to simplify matters by conceptually grouping these
disparate services in some way in order to facilitate the strategic management accounting
techniques like Activity Based Costing (ABC), (Lawson, R. A., 2005).
Patient care itself has three main components – outpatient, day care and inpatient care. The
essential difference between them is in the procedures and resources involved. Outpatients are
treated without being hospitalized, day care patients stay in a hospital bed during the day (to
recover from outpatient surgery, or invasive diagnostic or treatment procedures), and inpatients
spend more than one day in hospital. Outpatient care includes services provided by the
emergency department for non-admitted patients, various outpatient clinics and other areas on
hospital premises, and outreach or community services. Inpatients may require immediate, short-
term, acute care or longer, non-acute care (West, Timothy D. and West, David A. 1997).

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The researcher can conclude that the health care institutions have a lot of activities and cost pools
that must be analyzed and classified into cost pools, activities attached to these cost pools, and
financial and non-financial measures to scale the performance and cost of these activities through
one of the strategic management techniques.
MEASURES OF HEALTHCARE SERVICE OUTPUT
Many different kinds of indicators can be used to measure the output or volume of services
provided. They can be broad and general (e.g., number of patients admitted to hospital) or quite
precise (e.g., the number of brain surgeries performed). The general indicators have the
advantage that they can be used to measure the output from a number of different centers. The
more precise indicators can be tailored to particular centers. Much depends on how detailed the
costing exercise and management analysis is and whether comparisons between different centers
are required (Cooper, Robin and Kaplan, Robert S. 1999).
Managers everywhere make decisions based on accurate and timely information related to the
internal and external environment of their organizations. While gathering external information
depends on the quality of the overall state of the economy (accounting for transparency,
administration, reliability, etc.) in which a firm and its competitors operate, managing internal
information flows varies from one company to another. Regardless of its type, every internal
reporting system of every firm depends on accounting channels of reporting, namely on
managerial accounting. Managerial accounting (which includes Cost-based Management,
budgeting and budgetary Control) is concerned with the estimation of expenses and investments
that a firm is willing to make in order to achieve its business goals, improve control procedures
and foster monitoring of its financial status (O’ Connor, N.G. & Martinsons, M.G. 2006).
Using the right costing system (Full Absorption Costing, Marginal Costing, Activity-based
Costing - ABC, Standard Costing), combined with the right IT support can significantly improve
the information flows to the directors of a firm. The effectiveness of such a system is reflected on
the soundness of business decisions made by the firm’s executives and is measured by the
performance targets of the firm. As company needs grow and company sizes expand, demands
on reporting (and its support functions) are multiplying. In this context, commercially available
information systems allow companies to customize them based on their internal needs, so that
they can play a key role in making strategic and tactical decisions while boosting the overall
image of the firm in the eyes of internal and external stakeholders (Ken Whittaker, 2005).
A field that is of particular interest for studying managerial accounting systems in the service
sectors are hospitality industry and healthcare industry especially hospitals. Costing of hospital
products (part of service costing) aims at controlling costs (in order to reduce them while
improving quality) and using them for making strategic and tactical decisions. The number and
particularities of such activities further complicate the cost cost/return equation and the making
of relevant business decisions. The cost/return approach per individual activity is not applicable
anymore, because in certain cases there are ‘points of attraction’ that do not generate net gains
but they instead lead to revenues from related activities. In other cases, there is lack of necessary
capabilities for performing multiple activities (O’ Connor, N.G. & Martinsons, M.G. 2006).

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The need for cost-based management of hospitals is this obvious and is already well documented
Harris, P.,(1995), Hilton, R., Maher M. & Selto K. (2000), as the use of a cost system would
reveal a firm’s strengths and weaknesses, allow economies of scale, improve pricing strategies
and define the relationships that link capital, labor and materials. However, there are relatively
few research findings on the adoption of costing systems by hospital accountants and managers.
COST PROCESS IN A HOSPITAL BUSINESS
Costing records and presents financial and non-financial information related to the acquisition
and consumption of resources by a financial unit. It provides relevant information to both
financial accounting and managerial accounting. Costing in a hospital business is comprised of a
set of concepts and techniques that aim to relieve the gathering, analysis and use of historical
costs and other cost categories for use in the decision making process (Hilton et al, 2000).
Hospital executives need accurate and timely information regarding their costs, as would their
manufacturing counterparts. However, due to differences in the nature of activities and services
offered by hospitals, several costing systems used by manufacturing firms are not suitable for use
in the hospital sector (Harris 1995).
According to Harris (1995), there are no extensive references in the international research
literature on the use of costing by healthcare businesses, and especially hospitals. In contrast,
claim that over the last few years, there is significant research interest in costing and managerial
accounting issues in the hospital sector. This difference of opinions may be attributed to the lack
of applying new costing and managerial accounting practices in the healthcare sector. The cost
structure of healthcare firms is based on their administrative structure. For every organizational
unit, there is a corresponding set of profit centers, cost centers, investment centers and other
centers of accountability. The basic cost subcategories or basic cost centers of a hospital business
are the Hospital’s Operational Function, Marketing and Sales function, Financial and
Administration function, and Financial Function.
Every basic function or cost subcategory is further divided into sub-functions or cost centers, e.g.
hospital’s operational function. More specifically, every hospital unit is comprised of divisions
and departments that correspond to the unit’s cost centers. Based on the cost structure of a
hospital unit, itemized expenses are distributed and allocated to the functions responsible for
incurring the corresponding operational costs. The cost of support functions is allocated to the
main support centers in order to generate the total cost of the main centers. Support functions are
administratively part of the Production function (i.e of the hospital’s operational function)
(Garattini et al. 1999).
Support cost functions produce outcomes that contribute to the main cost centers of a hospital.
Hospital institutions share a key characteristic in terms of the products/services they offer: the
latter are consumed on the day of or during production time, thus creating revenues for the
department or costs for the cost center to which they belong. Hence, every operational
department acts as both a cost center and a profit center. Costs are therefore linked to
corresponding revenues that are created from the consumption of a product or service that is
developed or offered by each operational unit. All of these encompass the profitability and

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productivity aspects of both a department and the service line or healthcare products it offers
(Tsolmongerel, 2009).
Cost centers should be defined in such a way as to capitalize on an existing sense of identify
among hospital workers. This makes it easier to generate a collaborative response to a cost
related problem and any proposed improvement plan. Similarly, taking account of the way the
hospital is defined or identified by patients, the community, and payers, and the kind of services
likely to attract the attention of any of these groups makes the management accounting system
more responsive to issues that might arise (OECD Health care, 2006).
Cost centers should be classified broadly into either final or intermediate cost centers. The terms
“final” and “intermediate” have a very specific meaning here. The former are those cost centers
directly involved in the production of services for which the hospital is budgeted or reimbursed.
They are sometimes called revenue-earning cost centers. Intermediate cost centers provide
support services for the final cost centers but are not, by definition, revenue-earning centers. This
distinction is important because costs are handled differently. Final cost centers are compensated
directly for their services. Intermediate cost centers have to cover their costs by allocating or
mapping them appropriately among revenue-earning (or final) cost centers. Centers which offer
support services and would normally be considered intermediate should be classified as final cost
centers if their costs are reimbursed by paying customers or third-party payers (Pierce, Bernard
and Brown, Richard, 2003).
Final cost centers are all medical in nature (reflecting the primary purpose of hospitals). They
provide few, if any, services for internally referred patients. Outpatient clinics and inpatient
clinical departments would generally be considered examples of final medical cost centers.
Intermediate cost centers can be usefully divided into intermediate medical and intermediate
non-medical cost centers. Intermediate medical cost centers provide medical support services.
They may serve patients directly (e.g., radiology, operating room) or indirectly (e.g., blood
bank). Diagnostic services are usually intermediate cost centers. Intermediate non-medical cost
centers, sometimes called administrative and logistical cost centers, are those centers providing
overhead services to the entire hospital or large areas within the hospital. Examples include
general administration, housekeeping and maintenance services (King, M., I. Lapsley, F.
Mitchell, and J. Moyes, 1994).
The following process is designed to assist in generating a suitable list of cost centers for a
particular hospital or group of hospitals: (Tsolmongerel Tsilaajav, 2009)
1. Take, as a starting point, which give examples that would commonly appear in lists of
final, intermediate medical, and intermediate non-medical cost centers respectively.
2. Customize these lists – breaking down, aggregating, adding, removing, or rearranging
cost center titles according to management needs.
3. Use a common structure of cost centers for each hospital in the set of hospitals that are of
interest so that inter-hospital comparisons can be made.
4. Have several levels of aggregation to make the resulting list more adaptable to variable
organizational structures of hospitals. For example, a composite cost center such as

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“General and specialty surgery” could aggregate a set of lower-level, more detailed
specialized surgical cost centers.
5. Validate and standardize the resulting lists of cost centers using a representative hospital
sample.
6. Guide hospitals toward matching their medical services to the adopted list. This may
involve anything from re-naming some cost centers to changes in the organizational chart
in order to provide meaningful analyses for decision making. In measuring costs it is
useful to start by consulting expenditure records.
This article investigates the perceptions of hospital accountants and managers on how cost-based
management and decision making are linked within hospital operations. The focus of our
research was the hospital sector in Egypt. The main contribution of the research is to fill the gap
in this area of cost management in healthcare institution and to improve the performance of these
institutions through the proposed model.
SMA PROPOSED MODEL
This paper formulates a multidimensional model of SMA to be used as a performance measure in
the healthcare organizations with special emphasize on Egyptian hospitals. The model constitutes
of three dimensions; input measures, outputs and outcomes.
The model will handle the three perspectives of the SMA by identifying the input measures that
are suitable for each outputs and outcomes. The researcher try to identify the key concern of the
hospitals which are the accuracy and reliability of financial data, quality of decision making,
quality of service, and organization profitability through improving the performance measures of
the SMA.
Table(1): SMA proposed model
Input measures
outputs
outcomes
• Sales revenue
• Fixed cost as a proportion of
the total cost of the hospital
• Variable cost as a proportion
of the total cost of the hospital
• Indirect cost as a proportion
of total cost of hospitals
• Costing systems of the
hospital
• Allocation bases used by
ABC costing system
• Indirect cost to total (%)
• Cost per customer
• Food Cost
• Patient Cost
• Cost of Quality
• Residual income
• Shareholder value
• Cost of Capital
➢ Creating efficient cost
centers:
1. Intermediate cost centers
• intermediate
medical cost centers
• intermediate non-
medical cost centers
2. Final cost centers
• Outpatient clinics
• Inpatient clinical
departments
➢ Internal audit department
cost.
➢ Effective cost center
determination steps
Enhancing the accuracy and
reliability of financial data in
healthcare industry
• SMA Information
• Service Quality performance
➢ Profit center and Cost
center reports.
Improving the quality of decision-
making process regarding

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• Financial Performance data
• Non-financial Performance
measurements
• Techniques for creating and
managing organization value
• Environmental protection
process
➢ Reports of Products and
Services (cost and
quality).
➢ Hospital’s Operational
Function reports.(e.g.,
number of patients
admitted to hospital)
➢ Marketing and Sales
functions reports.
financial and non-financial issues
• ABC costing system
• Cost-volume-profit analysis
(break-even analysis)
• Kaizen costing
• Standard costing
• Target Costing
• Deferential Costing
➢ Selection of the most
appropriate SMA
technique.
Choosing the most appropriate
costing technique to enhance
performance and cost
management in Egyptian
healthcare industry
➢ Profit center and Cost
center reports.
➢ Reports of Products and
Services (cost and
quality).
➢ Hospital’s Operational
Function reports.(e.g.,
number of patients
admitted to hospital)
➢ Marketing and Sales
functions reports.
Enhancing the accuracy and reliability of financial
data in healthcare industry
• SMA Information
• Service Quality performance
• Financial Performance data
• Non-financial Performance measurements
• Techniques for creating and managing organization value
• Environmental protection process
• Sales revenue
• Fixed cost as a proportion of the total
cost of the hospital
• Variable cost as a proportion of the
total cost of the hospital
• Indirect cost as a proportion of total
cost of hospitals
• Costing systems of the hospital
• Allocation bases used by ABC costing
system
• Indirect cost to total (%)
• Cost per customer
• Food Cost
• Patient Cost
• Cost of Quality
• Residual income
• Shareholder value
• Cost of Capital
• ABC costing system
• Cost-volume-profit analysis (break-
even analysis)
• Kaizen costing
• Standard costing
• Target Costing
• Deferential Costing
➢ Creating efficient cost centers:
1. Intermediate cost centers
o intermediate medical cost
centers
o intermediate non-medical
cost centers
2. Final cost centers
o Outpatient clinics
o Inpatient clinical
departments
➢ Internal audit department cost.
➢ Effective cost center determination
steps
Selection of the most
appropriate SMA technique.
Improving the quality of decision-making process
regarding financial and non-financial issues
Choosing the most appropriate costing technique to
enhance performance and cost management in
Egyptian healthcare industry
Outcomes 1
Outcomes 2
Outcomes 3
Outputs 1
Outputs 2
Outputs 3
Figure (1): SMA proposed model

13
In studying Healthcare institution performance, SMA is essential to identify the accuracy and
reliability of financial data to be measured and to improve the quality of decision-making.
Although a number of SMA models exist, which are aimed to enhance performance and cost
management, many are too complex for institutions to be implemented. This proposed model
describes the process of management performance using SMA proposed measures. The
performance results of this model were represented by input measures, outputs, and outcomes.
The input included the measures proposed by the researcher to ensure the existence of specific
financial and non-financial information to be presented by the healthcare institutions to lead for
the outputs that includes an appropriate classification of cost and group of reports to be presented
for helping institutions to achieve the outcome which are the minimization of cost through
getting accurate and reliable financial and non-financial information that enhance the quality of
decision making process by selecting the most appropriate SMA technique for the institution.
outcomes are accuracy and reliability of financial data, quality of decision making, and
organization profitability. The main goals of an enterprise may vary based on many factors as
industry time, management’ perspective and believes, contextual and culture factors.
Although the inputs – outputs model helps in explaining the performance process in a very
simple linear way, prior research in this area have concluded that the interactions between inputs
and outputs are much more complex. This study was undertaken in order to better understand the
dimensions of performance measurement in healthcare organizations.
Overall, it is the measure and attainment of both the institution’s wants and needs and the
manager’s wants and needs that indicate the success of the institution at any one point in time.
Consequently, with ongoing review of the outputs and outcomes (via their related measures)
managers can determine if the attainment of the set goal is sustainable and whether the core
organizational strategies are appropriate.
METHODOLOGY
A questionnaire was designed and directed to managers of healthcare organizations (hospitals)
located in Egypt, to pick up information on the relationships between SMA techniques and the
cost minimization and performance enhancement. Judgmental sample included 100
questionnaires distributed among facility administrators and department heads, general
managers, cost accountants and auditors of performance, and financing and operations analysts
in Great Cairo Hospitals. Our responds were 88 and four questionnaires were excluded for
non-validity, to reach approximately 84 valid questionnaires that were returned with respondent
rate of 84 % which is statistically acceptable for data analysis. Data obtained was analyzed by
using Statistical Package for Social Sciences (SPSS). Frequencies and percentages were made
for all the questions, a combination of different techniques were used including descriptive
statistics, logistic regression model. Secondary data was collected from relevant textbooks,
journals, and online data bases.
STATISTICAL ANALYSIS
Sample Characteristics and Data Collection
The sample surveyed included the leading Egyptian hospitals enterprises. We chose to observe
the Egyptian luxury hospitals because they better conform to the requirements of our research;

14
they have better accounting department operations they have recognized the need for better cost
control, due to their sales volume and growth potential. They may also use more than one costing
system. The criteria used for the selection of the hospitals where both our accessability and
reputation. The research was conducted between February and June 2013 and was realised in two
phases.
Specifically, in the first phase participation form, accompanied by a cover letter where we made
a brief reference of the main goals of the study, was sent to the selected hospitals. Financial
managers were asked to indicate the type(s) of cost accounting practice(s) used by their
hospitals, as well as to state correspondence information in order to address the survey
questionnaire, in case they were interested. In the second phase of the research, the survey
questionnaire was designed and sent to the sampled hospitals. More specifically, interviews were
conducted with four Chief Accountants who had a long experience in cost accounting practices
in order to make sure that the questionnaires’ content was easy to understand. Through this
testing we managed to account for omissions or vagueness in the expressions used to formulate
the questions.
The participation form was sent to 14 hospitals responded positively in the first phase of the
survey (84% response rate). The main reasons they cited for non-response was the lack of time
and the fact that answering questionnaires was not one of their top priorities. The hospitals that
completed the participation forms were sent the questionnaire.
RESULTS AND DISCUSSION
This part of the paper will present and discuss the statistical analysis conducted by the researcher
to achieve the objectives of the research and verify the hypothesis of the research.
Descriptive analysis Table (2) Descriptive analysis:
No.
Dimensions
Mean
S.D.
C.V.
Highest mean
value >3.70
1
Accuracy of
financial data
3.92
0.7278
18.56
X1
X11
2
Quality of
decision
making
process
3.86
0.7334
18.99
X16
X17
3
Selection of
appropriate
cost
management
accounting
techniques
4.08
0.8235
20.20
X20
X21
According to descriptive statistics in table (2) it can be concluded the three dimensions of the
proposed model show a high acceptance rate with high mean values and average standard

15
deviation and coefficient of variation. Table (2) also, indicates the highest mean value variable
within each Dimension.
Reliability test Table (3) Reliability Test:
No.
Dimensions
Cronbach’s
Alpha
Highest Alpha
Coefficient
No. of
Measures
Intrinsic
Value
Rank
1
Accuracy of
financial data
0.904
X10= cost of quality
X11= Residual income
12
0.952
1
2
Quality of
decision
making
process
0.810
X14= SMA Information
X15= Service Quality
performance
6
0.900
3
3
Selection of
appropriate
cost
management
accounting
techniques
0.892
X20= ABC costing
system
X21= Cost-volume-profit
analysis (break-even
analysis)
6
0.944
2
Overall
results
0.949
0.974
Cronbach’s Alpha showed that the values for the three dimensions namely accuracy of financial
data, Quality of decision making process, and Selection of appropriate cost management accounting
techniques are 0.904, 0.810, and 0.828 respectively, which are acceptable as Cronbach's test
suggested that the percentage should not be less than 0.70. Table (3) included also, the rank of
the three proposed dimensions in accordance to the answers of the respondents showing their
ranking preference toward the dimensions.
Factor analysis: Table (4): Kmo and Bartlett’s Test
No.
Dimensions
Kmo and
Bartlett’s
Eigen value
Cumulative %
Sig.
1
Accuracy of financial
data
0.890
2.714
59.161
Chi _square=
0.000***
2
Quality of decision
making process
0.737
1.866
71.116
Chi _square=
0.000***
3
Selection of appropriate
cost management
accounting techniques
0.803
3.90
56.005
Chi _square=
0.000***
***Parameter is significant at the (.001) level
The confirmatory factor analysis conducted to test how well the measured variables represent the
Dimensions. It has two conditions to be a valid test which are:
• Kaiser-Meyer-Olkin Measure of Sampling adequacy, kmo, for sampling adequacy,
should be ≥ 0.50(greater than or equal 0.05).
• The significance correlation matrix level should be < 0.05 (less than .05) to indicate that
there are probably significant relationships among dimensions.

16
The key advantage is that the authors can analytically test the sampling adequacy with minimum
value of 0.50. It is obviously clear from table (4) that all the Dimensions Kaiser Meyer-Olkin
measures are above the 0.50 which indicate that the sample used was adequate to validate the
measures within each dimension.
Table (4) indicates eigenvalues, and cumulative variance explained for the three dimensions. The
table gives values based on initial eigenvalues. The "% of Variance" column gives the percent of
variance accounted for by each specific dimension, relative to the total variance in all the
variables. Also, the "Cumulative %" column gives the percent of variance accounted for by all
factors or components up to and including the current one.
Constrained Factor Analysis (CFA):
The confirmatory factor analysis is conducted to test how well the measured variables represent
the Dimensions. Table (5,6) show the variables and the four Dimensions used in the analysis
which were initially considered to express the proposed model. The Dimension validity is the
extent to which a set of measured items actually measures the Dimension. This has been
computed in the (CFA).
Table (4) the Constrained Factor Analysis used to measure the validity of the Dimensions. All
standardized regression weights (factor loading) are greater than 0.5 which means that all
measured variables are statistically significant. T-test for all measured variables is significant at a
level of significance less than0.001. All the insignificant measured variables are excluded from
the model. Table (5): Rotated component matrix (Dimension One)
Dimension one:
Accuracy of financial
data
Components
Chi-Square
Sig.
F1
F2
X5= Costing systems of
the hotel
0.789
1193.152
0.000***
X4= Indirect cost as a
proportion of total cost of
hotels
0.787
X6= Allocation bases used
by ABC costing system
0.775
X1= Sales revenue
0.708
X3= Variable cost as a
proportion of the total cost
of the hotel
0.694
X2= Fixed cost as a
proportion of the total cost
of the hotel
0.667
X7= Indirect cost to total
(%)
0.644
X8= Cost per customer
0.540
X9= Food Cost
0.522
X11= Residual income
0.835

17
X10= cost of quality
0.733
X12= Shareholder value
0.720
***Parameter is significant at the (.001) level
Component Number
121110987654321
Eigenvalue
6
5
4
3
2
1
0
Scree Plot
Figure (2): Screen plot (Dimension one)
Table (5): Rotated component matrix (Dimension Two)
Dimension Two: Quality of
decision making process
Components
Chi-Square
Sig.
F1
F2
X17= Non-financial
Performance measurements
0.859
491.464
0.000***
X18= Techniques for creating
and managing organization value
0.785
X13= Cost of Capital
0.769
X14= SMA Information
0.603
X15= Service Quality
performance
0.928
X16= Financial Performance
data
0.904
***Parameter is significant at the (.001) level

18
Component Number
654321
Eigenvalue
4
3
2
1
0
Scree Plot
Figure (3): Screen plot (Dimension two)
Table (7): Rotated component matrix (Dimension Three)
Dimension
Three: Selection
of appropriate
cost
management
accounting
techniques
Components
Chi-Square
Sig.
F1
F2
X23= Standard
costing
0.889
1117.802
0.000***
X24= Target
Costing
0.886
X22= Kaizen
costing
0.807
X25= Differential
Costing
0.786
X21= Cost-
volume-profit
analysis (break-
even analysis)
0.762
X20= ABC
costing system
0.690
***Parameter is significant at the (.001) level

19
Component Number
654321
Eigenvalue
4
3
2
1
0
Scree Plot
Figure (4):Screen plot (Dimension three)
THE LOGISTIC REGRESSION MODEL:
There are many important research topics for which the dependent variable is "limited." or
categorical response variable. Logistic regression is useful for situations in which you want to be
able to predict the presence or absence of a characteristic or outcome based on values of a set of
predictor variables. It is similar to a linear regression model but is suited to models where the
dependent variable is dichotomous. Logistic regression coefficients can be used to estimate odds
ratios for each of the independent variables in the model. Logistic regression is applicable to a
broader range of research situations than discriminant analysis.
Table (8): Stepwise logistic regression model to determine the impact of three dimensions on
the strategic management accounting techniques
Dimension one: Accuracy of financial data
No
Independent
Variables
Estimated
coefficient
Wald test
Chi –square test
R2
Prob.
Value
Sig.
Value
Sig.
1
Constant
-10.042
36.181
0.000***
72.993
0.000***
45%
0.0
2
X2
0.851
7.172
0.007**
0.70
3
X3
0.897
16.695
0.000***
0.71
4
X9
0.751
11.636
0.001**
0.68
( )
( )
 
1
9751.03897.02851.0042.10
1−
+++−
−
+= xxx
eAP
Dimension Two: Quality of decision making process
1
Constant
-5.921
32.090
0.000***
58.858
0.000***
53.3%
2
X14
0.661
15.977
0.000***
0.66
3
X18
1.245
25.890
0.000***
0.77

20
( )
( )
 
1
18245.114661.0921.5
1−
++−
−
+= xx
eQP
Dimension Three: Selection of appropriate cost management accounting techniques
1
Constant
-7.669
38.136
0.000***
96.563
0.000***
55.8%
2
X23
0.953
14.370
0.000***
0.72
3
X22
1.426
24.269
0.000***
0.81
( )
( )
 
1
22426.119953.0669.7
1−
++−
−
+= xx
eSP
The aggregate model for the three dimensions
1
Constant
-7965
41.961
0.000***
72.993
0.000***
40.10%
0.88
2
SMA
2.035
44.761
0.000***
( )
( )
 
1
035.2965.7
1−
+−
−
+= SMA
eYP
* Parameter is significant at the (.001) level
** Parameter is significant at the (.005) level
***Parameter is significant at the (.000) level
According to Stepwise multiple logistic regression model in table (7), the following can be concluded:
1- Chi –square test:
The chi-square statistic is the change in the -2 log-likelihood from the previous step, block, or model. Use
the “Model Chi-Square” statistic to determine if the overall model is statistically significant, Like F test in
linear regression model, since The value of "chi square test" is (72.993) with significant at the (0.000)
level, then the researcher concludes that the overall independent variables statistically significant impact
on the dependent variable or the model is fitted to logistic regression.
2- The Classification table :
The classification table helps you to assess the performance of your model by cross tabulating
the observed response categories with the predicted response categories. For each case, the
predicted response is the category treated as 1, if that category's predicted probability is greater
than the user-specified cutoff. Cells on the diagonal are correct predictions, whereas Cells off the
diagonal are incorrect predictions. The % correct yes for non-accuracy is (69%), % correct No
for accuracy is (78.8%), and overall % correct scores is (74%).
3- Coefficient of determination:
The Independent Variables accepted in the model explain (40.10% ) from total variation of log
odds ratio or logit model ,i.e., dependent variable, dividends payment, the rest percent due to
either the random error in the regression model or other Independent Variables excluded from
regression model. Larger pseudo r-square statistics indicate that more of the variation is
explained by the model, to a maximum of 1.
4- Wald test:
It would be useful in determining the significant value of each of the individual independent variables
coefficient in the logistic regression model. The ratio of B to S.E., squared, equals the Wald statistic. If
the Wald statistic is significant (i.e., less than 0.05) then the parameter is useful to the model. The

21
significant independent variable is, Strategic management accounting techniques, with significant at less
than (0.05), (0.001) level respectively.
5- Probability event:
The Probability event of each independent variable is the odds ratio divided by Odds ratio plus
one, then the important variables that are included in the three dimensions with probability (0.88)
By substituting the values of independent variables, we can then predict the dependent variable
which is the effect on the strategic management accounting techniques.
HYPOTHESES VERIFICATION:
The stepwise regression results can show the relation between the three dimensions measures,
the output that is achieved by the researcher and the most influential measures that are included
in the calculation of the healthcare institutions performance effect.
The first model shows that X2 (Fixed cost as a proportion of the total cost of the hotel), X3
(Variable cost as a proportion of the total cost of the hotel), and X9 (Food Cost) are most
influential measures for the accuracy of the financial information, which verify the first
hypothesis. R2 of the model explains 45% of the output.
The second model shows that X14 (SMA Information), and X18 (Techniques for creating and
managing organization value) are most influential measures for the quality of the decision
making process which verify the second hypothesis. R2 of the model explains 53.3% of the
output.
The third model shows that X22 (Kaizen costing), and X23 (Standard costing) are most
influential measures for Selection of appropriate cost management accounting techniques which
verify the third hypothesis. R2 of the model explains 55.8% of the output.
The analysis shows also the aggregate model of the three dimensions, which verify the proposed
model, enhance performance and cost management in Egyptian healthcare industry. R2 of the
model explains 40.10% of the output.
The following results were reached by the researcher:
• The accounting performance measures used in the Egyptian healthcare industry have to
be modified by developing more efficient measures and by directing these measures more toward
other perspectives than the financial perspective.
• The proposed model application will enhance the accounting performance measures used
in the healthcare industry by presenting quantitative measures for the three perspectives of the
model.

22
• Empirical study indicated also, some other measures that not included in the model and
already exist but without being taken into consideration in the final logistic model.
• The proposed model presented the three dimensions related to accuracy of financial data,
quality of decision-making process, and selection process of appropriate cost management
techniques. These dimensions have been verified through the statistical analysis and indicated
the suitability of the proposed model for improving the performance of the healthcare industry.
CONCLUSION
Given the importance of the hospital sector in the global economy, it is necessary to apply
management control systems in hospital institutions. Hospital managers should monitor the
external environment in order to define appropriate and effective strategies. Decision-making
should be based on Managerial Accounting tools, including costing, budgeting and budgetary
control tools. Separating hospital operations into multiple parts and identifying costs centers for
each part is a way to analyze information on the performance, profitability and overall financial
status of hospitals. Using the appropriate costing system (Full Absorption Costing, Marginal
Costing, Activity-based Costing, and Standard Costing) will result in proper identification of
costs and profitability of hospital units. In addition, hospital management control systems should
contribute to the use of budgets as forecasting tools, the recording of institution environment
effects planning and control on a hospital’s operations .
As described earlier, the main goal of costing is the accurate recording and allocation of costs to
goods, services and customers. With the use of managerial accounting tools, these elements will
improve the quality of information flows used for decision making. The decision making process
is alleviated when all data used in the process are based on accurate, complete, flexible, relative,
simple, double-checked, accessible, secure, reliable, timely and value-based information
The use of SMA in the hospital sector is deemed necessary as they will rationalize costs related
to the allocation and transfer of information and knowledge to decision makers. This further
entails timely and continuous data feedbacks to the system and its users, as well as establishing
auditing and monitoring processes for the system.
Researcher believes that this study is part of a broader future research effort which will
investigate the use of budgeting and budgetary controls by hospitals, based on costing studies for
hospitals. If all the tools of managerial accounting are deployed within hospitals settings and are
monitored by SMA, hospital managers will have more complete, timely and accurate
consultation on: a) cost behaviors; and b) decision making for both short-term and long-term
planning c) accurate and high quality reports.
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