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The purpose of this paper is to present the current usage of cost accounting methodology in Croatian public hospitals through conducted empirical research and to provide opinions of accountants and financial officers regarding possible implementation of cost accounting methodology in public hospitals.In the paper, the authors analyze the accounting system in Croatian public hospitals, identifying the flaws of the current accounting system with regard to the recording and allocation of costs. National healthcare systems of different European countries provide a theoretical background for the usage of accrual accounting basis and cost accounting methodologies, showing better governance and financial sustainability of public hospitals which have introduced cost accounting methodology. The conducted empirical research shows that accountants and financial officers believe that the healthcare system in Croatia is ready for a change in the current accounting system based on the modified accrual Croatian Economic Survey : Vol. 18 : No. 2 : December 2016 : pp. 5-38 basis through the implementation of accrual accounting basis and full costing approach to cost allocation. Full costing approach is also known as activity-based accounting method for cost allocation. The authors also recommend some initial steps for implementation of the new cost accounting system in Croatian public hospitals. Ivana Dražić Lutilsky

Before conducting the research, two main hypotheses were proposed: H1: The majority of Croatian production companies use traditional accounting methods for cost allocation. H2: Direct production costs make up the largest portion within the production cost structure for the majority of Croatian production companies. Because of this production cost structure, modern cost allocation accounting methods would not contribute to more reliable company profi tability evaluation and business decision-making. The research is based on a specifi c sample including every important Croatian public production company. The process of cost allocation process is not easy. It is a diffi cult and complicated procedure that requires the application of appropriate accounting methods. The process of allocating costs to cost objects is realized through the application of certain accounting methods. These accounting methods often cannot provide fair and objective cost allocation because they have arbitrary bases that are not always appropriate.

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