Making Costing Fun

But, how much does it cost?

• Session Objectives:– Introduce costing as a tool for decision

making (advocacy and design).– Empower participants to manage costing

activities– Sensitize participants to the importance of

using appropriate costing methods– Costing = FUN

Session Organization

1. Clearing up confusion

2. Costing and public expenditures

3. Costing a Population and Reproductive Health Package (Costing Quality Checklist)

4. Management Input Time-line Tool

An Innocent Question?1. What are the available resources?

(Resource Envelope, Constraints)

2. How much are we currently spending?

(Expenditure Review, Flow of Funds, National Health Accounts)

3. What is the unit cost?

(Average Costs)

4. What is the additional cost?(Marginal Cost)

Government of Zimbabwe

External FinanceDonor & Lenders

PUBLIC

Private Sector

Households

PRIVATE

Sources of Funds

MOH&CH Budget

Other Ministries

Local Government

Social DimensionsFund (SDF)

Health Services Fund(HSF)

Private Insurance

Out of Pocket other thanHSF

Funding Mechanisms

Public Providers MOH&CW

Public ProvidersOther Ministries

Mission Providers

Private Providers

Providers

Flow of Funds- Zimbabwe

Costing Quality Checklist• Are Objectives Clearly Identified?

• Does the Methodology Selected Match the Objectives?• Does the Methodology Account for Overhead Costs?

• Does the Methodology Correctly Apportion Joint Costs?

• Does the Methodology Distinguish Between Fixed and Variable Costs?

• Does the Methodology Distinguish Between Recurrent and Capital Costs?

• Does the Methodology Produce Average or Marginal Costs?

• Which Point of View Does the Methodology Take?

• Does the Methodology Address Opportunity Cost or Just Accounting Costs?

• Does the Costing Exercise Take Advantage of All Data Sources?

• Are the Data Collection Methods Used Appropriately?

• Are All the Assumptions Clearly Stated and Realistic?

• Were Sensitivity Analysis Undertaken to Test Assumptions?

CQC: Choosing a Methodology

Top-Down Costing• Step 1: Aggregation of total expenditure by

source (gov’t, donors, households)• Step2: Desegregation of expenditures by type

of service and activity

Bottom-Up Costing• Step 1: Identify inputs into each element of the

package• Step 2: Cost each element• Step 3: Aggregate costs

QUESTION: What are the advantages and disadvantages of each approach?

CQC: Choosing a Methodology

Question: Which approach is more likely to produce double counting of some cost elements?

Top-Down Bottom-UpLevel of Detail Lower HigherAccuracy(for eachintervention)

Lower Higher

Accuracy(for each package)

Higher Lower

Completeness Better May excludeelements

Cost Cheaper Moreexpensive

Time Faster Longer

CQC: Choosing a Methodology

(Determining Factors)

• The objective of the costing exercise (What are the expected outputs)

• Time-Frame for producing results

• Data Availability

• Resource Availability

CQC: Choosing a Methodology (Simulation Models)

Using Simulation Models• Helps in understanding cost implications of policy

changes. Examples include:– cost implications to alternative plans for phasing in

interventions– cost implications of different forms of targeting– cost implications of alternative technical

interventions– cost implications changes in the delivery strategy– cost implications of institutional reforms

• Perform sensitivity analysis for testing assumptions or targets. Examples include:– Assumptions about coverage rates– Assumptions about price changes (including

exchange rate fluctuations)• Continuously updating inputs and assumptions

Stages of Costing

• Identification: The process by which all relevant inputs into the provision of the service are identified and classified

• Quantification: Assigning non-monetary quantities to measure the contribution of inputs into the provision of the service to be costed. ( Natural Units)

• Valuation: Assigning monetary value to inputs

CQC:

Accounting for Overhead or Administrative (Indirect) Costs?

Direct Costs: resources identified with service or product. Examples: salaries, contraception, equipment

Indirect Costs: resources needed to support service delivery but not directly identified with the service or the product. Examples: Administrative costs, Monitoring & Evaluation costs

QUESTION: Are Medical schools costs direct or

indirect costs?

CQC:

Accounting for Overhead or Administrative (Indirect) Costs?

Hints:At the Identification Stage: review to ensure all possible indirect costs are accounted for. Typical omissions include:

• Training (initial and refresher; training of trainers; orientation)• Overhead for training institutions• Supervision costs• Administrative overhead

At the Quantification Stage:review how overhead costs are allocated to different services (see joint costs discussion below)

CQC:

Correctly Apportioning Joint Costs?

• Non-Joint Costs: Resources that are used for one intervention. Examples: cost of an IUD, cost of medicines, disposable medical supplies

• Joint Costs: Resources used for more than one intervention. Examples: costs of clinic resources, salaries, equipment

QUESTION: How would you allocate utility costs across services provided at a health center?

CQC:

Correctly Apportioning Joint Costs?

Hints:

• At the Identification Stage: Ensure that cost items are correctly identified as Joint or Non-Joint

• At the Quantification Stage: Ensure that correct techniques are used for allocation of joint costs

CQC:

Distinguishing Between Fixed and Variable Costs?

• Fixed Costs:Costs which do not vary with the quantity of output in the short run (about 1 year). Examples: rent, lease payments, fixed salaries

• Variable Costs:Costs which vary with the level of outputs. Examples: supplies, food, drugs.

QUESTION: Can you think of an example of a fixed cost becoming a variable cost?

CQC:

Distinguishing Between Fixed and Variable Costs?

Hints:• At the Identification Stage: Ensure that cost

items are correctly identified as fixed or variable• At the Quantification Stage: Ensure that

reasonable assumptions are made about expected output changes

CQC:

Distinguish Between Recurrent and Capital Costs?

• Recurrent Costs: Costs associated with inputs that will be consumed or replaced in one year or less. Examples: salaries, maintenance, medicines.

• Capital Costs: Costs or resources that have a life expectancy of more than one year. Examples: buildings, machines

QUESTION: Are training costs recurrent or capital costs?

CQC:

Distinguish Between Recurrent and Capital Costs?

Hints:

• At the Identification Stage: Ensure that each cost item is clearly identified as recurrent or capital.

• At the Quantification Stage: Identify the expected number of years of operation for capital cost items

• At the Valuation Stage: Ensure that appropriate annualization rules are used in costing capital costs. Check on the valuation given when market prices are not available.

CQC:

Average or Marginal Costs?• Average Cost: The total cost divided by the

number of units of output. Example: The cost of a visit to a clinic, The cost of an overnight stay at a hospital

• Marginal Cost: The extra cost of one additional unit of output. Examples: The cost of expanding coverage of an intervention

Hints:• Choosing an average or marginal cost focus depends on

the objective of the costing exercise. If the objective is to look at variations across levels of delivery or regions, average costs are more important. If you are considering expansion in the delivery of an intervention then marginal costs are more important.

CQC:

Which Point of View to Take?Possible Points of Views:• The Ministry of Health (program costs)• Other Government Entities (transfers such as workers

compensation)• Consumers (Society-users costs) e.g. transportation costs,

waiting time, all costs born by the consumer• Insurance Providers

QUESTION: For preparing a project, which costing point of view would you take?

Hints:• At the Identification & Quantification Stages:

Ensure that all identified costs are consistent with the costing point of view.

CQC: Addressing Opportunity or Accounting Costs?

• Accounting (Financial) Costs: Include all outlays made by the program to purchase goods and services

• Opportunity (Economic) Costs: The value of the most productive alternative use of the resources.

QUESTION: Have you come across an Health project that calculates opportunity cost?

Hints:• At the Valuation Stage: Ensure that there is recognition of

donated resources. E.g. commodities and volunteer labor. The question that needs to be addressed is how will the program change if donated inputs are no longer available.

CQC:

Appropriate Data Collection Methods

• Completeness

• Reliability

• Representativeness

CQC:

Appropriate Data Collection MethodsCost data needed for:• Labor (salaries and benefits)• Medications, Contraceptives, Vaccines• Supplies• Training (in-service, pre-service)• Operation & Monitoring• Supervision & Monitoring• Equipment• Vehicles (transportation costs)• Buildings• Information Campaigns

QUESTION: Is this list complete if the point of view it that of society?

QUESTION: Is this list complete if we are calculating the economic cost?

CQC:

Appropriate Data Collection MethodsData Sources and Collection Methods:• Ministerial Accounts (Ministry of Health & Family Welfare)• Provider or Facility records• Donor/Lender records• Facility-Based Surveys (time-use surveys, equipment and

supplies surveys, and utilization surveys)• Household surveys• Insurance records• Market Surveys for Prices• Interview or Expert Opinion• Health management information systems (demographic

and epidemiological information)• Central purchasing organization• Essential drugs programs

CQC:Assumptions, Assumptions

• Are the Assumptions made explicit and clearly stated?

• Are the assumptions realistic?

• Were simulations undertaken to test assumptions and identify cost implications?

Management Inputs Time-Line

• At the Initiation Stage (Lining up the resources)

• At the Preparation Stage (Monitoring and adapting to changes in design):

• At the Review Stage

Management Inputs At the Initiation Stage

1. Identify package of interventions considered

2. Clearly state the objectives of costing

3. Identifying costing staff or consultants.

4. Develop Terms of Reference (special attention to methodology, outputs, and timing of deliverables).

5. Ensure funds are available for the costing activity.

6. Identify team members to manage the costing activity.

Management Inputs At the Preparation Stage

1. Monitor developments: Focus on delivery date slippage and staffing.

2. Track prioritization activities and implications for re-design

3. Track choices of service delivery strategy and technology

4. Follow-up on findings of costing outputs relating to efficiency gains and cost savings.

5. If economic evaluation is undertaken, use results for policy dialogue and advocacy.

Management Inputs At the Review Stage

1. Incorporate the review of findings into the final design.

2. Ensure adequate documentation of costing in Project Plan