concepts and concepts and definition of cost destanul aulia,km, mba, mec destanul aulia,km, mba, mec...
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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