CONCEPTS AND CONCEPTS AND DEFINITION OF COST DESTANUL AULIA,KM, MBA, MEC DESTANUL AULIA,KM, MBA, MEC PERTEMUAN -2

WHY STUDY COSTS? Can provide considerable useful information To indicating the amount of funds (from all sources) Efficiency Estimating Preliminary judgments Equity (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.

1Table Cost Report, Laboratory, June 1999 Amount Direct Cost Salaries$ Supplies5.000 Other Total direct Cost $20.000

Total direct cost $ Allocated cost Employee benefits $ 150 Administration 500 Maintenance 250 Housekeeping 200 Laundry 100 Depreciation 160 Total indirect cost $ Total costs $ Relative value units ( RVUs) 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 costed 2. Behavior of cost to output or activity 3. Management responsibility for control 4. Future cost versus historical cost

1. Traceability This is the most basic of cost classification. There are 2 major categories:  Direct and Indirect cost  Direct cost is specifically traceable to a given cost objective Salaries, 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 assignment Depreciation, 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. Fixed  C. Semi-fixed and  D. Semi-variable

Supplies Cost 0 Output – RVUs Note : Supplies cost = $.50 x number of Relative Value Units Fig. Cost behavior of supplies cost, Variable $.5.000

2. Cost behavior Variable Costs change as output or volume changes in a constant and proportional manner  Output 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 Depreciation Cost/ Mont $ 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 , salary at $ 9000 etc see fig 3).

4Salary Costs $ $9.000 $8.000 $7.000 $6.000 Fig, 3 Semifixed

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 Fig 4 Cost behavior of other cost, Semi variable Other cost = $ per month + $.40 x RVUs 5.000

Traceability Fig 6, Lab Cost behavior Categorization VariableFixedSemifixedTotal Other$ Other$ 1.000Salaries$ Direct Supplies5.000 $ $ 1.000$ $ Employee Depreciation$ 160 Maintenance $ 250 IndirectBenefits$150Administration$ 500Laundry$ 100 Housekeeping100Housekeeping$ 100 $250$ 760$ 350 $ Totals$9.250$ 1760$ $

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 direct There 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 costs  Sunk cost  Incremental cost  Opportunity 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 cost  Opportunity costs are values forgone by using a resource in a particular way instead of in its next best alternative way