CONCEPTS AND CONCEPTS AND DEFINITION OF COST DEFINITION OF COST

DESTANUL AULIA,KM, MBA, MECDESTANUL AULIA,KM, MBA, MEC

PERTEMUAN -2

WHY STUDY COSTS?

Can provide considerable useful informationTo indicating the amount of funds (from all

sources)EfficiencyEstimatingPreliminary judgmentsEquity (fairness)

WHAT ARE THE COST?

Economist define: “Cost as the value of resources used to produce something, including a specific health

service or a set of services (as in a health programme)”

Accountant define:

“Biaya adalah kas atau nilai ekuivalen kas yang dikorbankan untuk mendapatkan barang atau jasa yang diharapkan memberi manfaat saat ini atau di masa datang bagi organisasi”

COST CLASSIFICATION

1. Classification by inputs

Capital costs: Vehicles, Equipment, Buildings and space, Training non recurrent

Recurrent costs: Personnel, supplies, Vehicles (operation & maintenances), Buildings (operation & maintenance), training in recurrent

2. Classification by function/activity Training Supervision Management Monitoring and evaluation Logistic and transport

3. Classification by level National or central programme Provincial, regional or district level Village or household level

4. Classification by source Ministry of Health Other national government or departments Local government bodies International donors Bilateral donors Independent nongovernmental charitable Private organizations Community group Individuals

5. Classification by currency Rupiah = Rp US Dollar = $ Ringgit = RM

6. Classification by volume of production

Fixed cost Variable cost

7. Classification by length of use Investment cost Operational cost Maintenance cost

THREE ESSENTIAL ELEMENTS TO CLASSIFY COST

1. It must be relevant to the particular situation

2. The classes (categories) must not overlap

3. The classes chosen must cover all possibilities

II. Cost concept

Cost may be categorized in a variety of ways to meet decision maker’s specific needs. But the total value of cost is the same

Using one cost concept in place of another simply slices the total cost pie differently

Example the table 1.

1 Table Cost Report, Laboratory, June 1999

          Amount      

Direct Cost

Salaries $ 10.000

Supplies 5.000

Other   5.000

Total direct Cost $ 20.000

Total direct cost $ 20.000

Allocated cost Employee benefits $ 150 Administration 500 Maintenance 250 Housekeeping 200 Laundry 100 Depreciation 160Total indirect cost $ 1.360

Total costs $ 21.360Relative value units ( RVUs) 10.000

Table 1, Cost report, laboratory ($20,000 may be classified as direct cost and $ 1,360 indirect cost, but this may be classified on controllability)

II A. Four major categories of cost

1. Traceability to the object being costed2. Behavior of cost to output or activity3. Management responsibility for control4. Future cost versus historical cost

1. Traceability

This is the most basic of cost classification.There are 2 major categories:

Direct and Indirect costDirect cost is specifically traceable to a given cost

objectiveSalaries, supplies etc is direct cost of the laboratory

Indirect cost cannot be traced to a given cost objective without resorting to some arbitrary method of assignmentDepreciation, administrative etc

1.Tracebility

Incorrect classification is a common problem in cost accounting. Costs are accumulated on a department or responsibility center basis, so direct and indirect regarding that department

The major direct cost categories of most departments : Salaries Supplies

- Other (purchased services such as dues, travel and rent etc)

Indirect cost categories usually include:- Depreciation- Allocated costs of other department- Employee benefits etc

2. Cost Behavior

Cost is also classified by the degree of variability in relation to output, there are:

A. Variable B. FixedC. Semi-fixed and D. Semi-variable

 Supplies Cost    

0  Output – RVUs 10.000

Note : Supplies cost = $.50 x number of Relative Value UnitsFig. Cost behavior of supplies cost, Variable

 $ .5.000             

2. Cost behavior

Variable Costs change as output or volume changes in a constant and proportional mannerOutput increase 10% cost also increase 10%

Fixed cost do not change in response to changes in volume, a function of the passage of time, not output

3

DepreciationCost/ Mont

 

 

$ 160                

 

               

0 Output-RVUs

Note : Depreciation cost = $ 160 per month.Fig 2. Cost behavior of depreciation, Fixed

2. Cost behavior

Semi-fixed costs do change regarding changes in output, but they are not proportional.

A Semi-fixed (steps) cost might be considered variable or fixed, depending on the size of the steps relative the range of volume (volume of output 6000-8000, salary at $ 9000 etc see fig 3).

4 Salary Costs  

$ 10.000    

$ 9.000      

$ 8.000    

$ 7.000      

$ 6.000  

               

Fig, 3Semifixed 2.000 4.000 6.000 8.000 10.000

2. Cost behavior

Semi-variable costs include of both fixed and variable costs

Eg. Utility costs, they are may be some basic, fixed requirement per unit time (m,y) regardless volume (normal heating, lighting), but there is also likely to be a direct, proportional relationship between volume and the amount of the utility cost

Other Costs  

 

$  

 

 

$ 1.000  

               

Output-RVUs 10.000

Fig 4 Cost behavior of other cost, Semi variable Other cost = $ 1.000 per month + $ .40 x RVUs

5.000

Traceability

Fig 6, Lab Cost behavior Categorization

Variable Fixed Semifixed Total

Other $ 4.000   Other $ 1.000 Salaries $ 10.000

Direct Supplies 5.000      

  $ 9.000   $ 1.000 $ 10.000 $ 20.000

                 

Employee   Depreciation $ 160 Maintenance $ 250

Indirect Benefits $ 150 Administration $ 500 Laundry $ 100

Housekeeping 100 Housekeeping $ 100  

  $ 250 $ 760 $ 350 $ 1.360

                 

Totals $ 9.250 $ 1760 $ 10.350 $ 21.360

3. Controllability

One of the purposes of gathering cost info is to aid management control.

To evaluate of the management control process, costs must be assigned to individual responsibility centers, where designated manager is responsible for cost control.

? What proportion of the total costs charged to a department is the manager responsible?Controllable and Non-controllable costs

3. Controllability

There are 3 approaches in designating controllable costs:1. As the total cost charged to the department

This grossly overstates the amount of cost actually controllable

2. Limited to those costs classified as directThere may be fixed costs attributed directly to the

department that should not be considered controllable (equipment rent)

3. Only those costs that are direct or variable

4. FUTURE COSTS

Is historical cost useful?A variety of concepts has been used for

decision-making process:Avoidable costsSunk costIncremental costOpportunity cost

4. Future Costs

They are cost that can be eliminated or saved if an activity is discontinued; they will remain only if the activity continues

If the hospital reduce its volume by 50% because of cost-containment pressure, what would it save? (multiplication of current average cost per admission?)Can depreciation cost be saved?

4. Future Cost

Sunk cost are unaffected by the decision under consideration (reduce 50%) for example of sunk costs= depreciation, administrative salaries, insurance etc

4. Future Cost

Incremental cost Represent the change in cost that result from a

specific management action Eg. The incremental cost of signing a new contract

to generate 300 new admission

Relationship btw incremental (increase volume) and avoidable cost (reduce volume)

4. Future Cost

Opportunity costOpportunity costs are values forgone by using a

resource in a particular way instead of in its next best alternative way