Costing Princples and Business Control Systems (Assessement Criteria 1.1)

5/21/2018 Costing Princples and Business Control Systems (Assessement Criteria 1.1)

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Assessment criteria 1.1


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Aim

At the end of this session, learner should

be able to explain the costingprinciples and the business controlsystemin health and social care

organisations


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Introduction to Costing

According to the official terminology of CIMA (2005),it defined Costing as the technique and process ofascertaining cost. These costing techniques compriseprinciples and rules to ascertain cost of products orservices.

Rajasekaran and Lalitha (2010) defined cost as theamount of resource used in exchange for goods orservices. The resources used can be money or moneysworth, which is usually expressed in monetary units

CIMA (2005) Official Terminology. CIMA Publication; Rajasekaran V.; Lalitha R. (2010) Cost accounting. Pearson Education India


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For Example The cost of a routine nursing care in a hospital can be

80

The cost of providing mental care in a home can be500

Health and social care managers need to understandhow to ascertained and determined this cost


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Cost Categories

Cost can be categorized according to its traceability

Direct cost

Indirect cost

Cost can be categorized according to its Behaviour

Fixed Cost

Variable Cost

Semi Variable

Semi Fixed Cost


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Cost category according traceability (Direct and

Indirect cost)A direct cost is specifically traceable to a given cost

object. A cost object is a product, process, department,or activity for which the health organisation wishes toestimate the cost, such as a medical test, a care visit, ora medical procedure.

Indirect costs cannot be traced to a given cost objectwithout resorting to some arbitrary method ofassignment.


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Cost category according to behaviour (Fixed,

Variable, Semi-variable and semi-fixed cost

Fixed and Variable cost

A cost is fixed if, within a specified period of time, itdoes not change in response to changes in the level of

activity. A variable cost is one that changes in responseto changes in the level of activity, it changes in directproportion to the volume of activity, that is, doublingthe level of activity will double the total variable cost.

(Broadbent and Cullent , 2003)

To illustrate this concept, we will use the example ofrunning a care home

Broadbent M. and Cullen J. (2003) Managing Financial Resources. 3rd Ed. Routledge


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The cost of licensing a care home is fixed for a

particular period of the licensing regardless of thenumber of resident in the care home, likewise thecost of rent of the building will remain fixed forthe period of the lease regardless of the number of

staff and resident in the care home.

The light, heating, carers and toiletries cost is

variable since amount of money spend on thesecost will vary directly with the number of residentin the care home.


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Semi-variable and semi-fixed cost

Semi-variable cost includes both a fixed and avariable element. For example, a telephone billcontains a fixed standing charge and a variable

charge based on the number of units dialled.

A semi-fixed cost or stepped cost is one where the

cost remains constant for a range of activity; thenwhen the activity increases still further the cost willtake a step upward.


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For example, a care supervisor/manager, up tocertain level of activity in the care home onesupervisor/manager is sufficient.

However, if the activity and therefore thenumber of resident been cared for increases,it will probably be necessary to employanother care manager.


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How costing principles are used in Health and Social care

Costing can be use by the government and its health agenciesin determining the cost of contract / procurement for localhealth and social care providers by the CCG thorough;

Competitive tendering

Any qualified provider (AQP) Single Tender Action (NHS, 2012a)

With costing principles, the government can determine

accurately how much it will cost to buy a particular healthservice from a provider. It also assist the government inplanning for the local community on how much it will cost toprovide a particular health service

NHS (2012a) Procurement of healthcare, What are the procurement options?. Commissioning Development Directorate

http://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdf
http://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdf


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Competitive tendering(CT)Outsourced services obtained through price competitive

tendering might cost less, but profit becomes moreimportant than value in the return on investment inservices run by the private sector on the NHSbehalf

Any Qualified Provider (AQP) scheme, are now set to

become key instruments for commissioning NHSservices in England. Members will need to understandwhat these terms mean and how their services may beaffected


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Break even Analysis:

Break-Even Analysis is an expected component ofmost business plans, especially for start-up companies.It shows how much revenue you need to cover for bothfixed and variable costs.


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Cost information and cost benefit analysis are

frequently used by health and social careorganisation to monitor cost and make decisionabout expenditures. Cost data are very useful inbudget preparation and forecasting for the

financial year

Providers use cost data to manage services and

improve operational efficiency. Cost data is alsoused to support the development of pricing andcurrency design for reimbursement purposes


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THE NHS APPROVED COSTING GUIDIANCE

According to Monitor (2013), the NHS financial regulator,who published the costing principles that should be followedby health and social care managers. Quoting one of themanaging director of MONITOR, Adrian Masters saying;

Understanding the real cost of patient care is an essential element ofthis new role. Costing services accurately has the potential to deliverhigher quality care to patients and better value for the NHS, boththrough better prices and improved information for clinicians andother decision makers at health care providers (MONITOR, 2013 p.2)

The Approved Costing Guidance sets out the approach tocosting that Monitor encourages providers of NHS-fundedservices to adopt

MONITOR (2013) Approved Costing Guidance. Available at:http://www.monitor.gov.uk/sites/default/files/publications/6JuneResissuedApprovedCostingGuidanceToPublish.pdf


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The six costing principles approved by the NHS

Principle 1 Stakeholder engagementEffective costing requires input from a wide range ofstakeholders, including non-finance staff.

Principle 2 ConsistencyFor some costing purposes, a consistent approach isrequired across or within organisations.

Principle 3 Data accuracyAccurate costing relies on the quality of the underlyinginput data.


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The six costing principles approved by the NHS (contd)

Principle 4 Materiality

Costing effort should be focused on material costs andactivities.

Principle 5 Causality and objectivity

Costing should be based on an understanding ofcausality to minimise its subjectivity.

Principle 6 Transparency

Costing should be transparent and auditable


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THE BUSINESS CONTROL SYSTEMS

The purpose of business control systems is toensure that organisation carries out its

strategy; in making sure that resources areobtained and used efficiently (Anthony andYoung, 1999). It also provides a framework ofprocesses and activities designed to reducethe risk of error or fraud.

Anthony R.N and Young D.W (1999) Management Control in Non-profit Organisation. 6th Ed. McGraw-Hill


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THE BUSINESS CONTROL SYSTEMS - Budgeting

The budget set the tune for managers in managingfinancial resources. It compels, coordinate, motivate,communicate, motivate and evaluate the performanceof health care managers.

With budgeting, managers have a clear boundary on

how much is set for each project and as such they cantspend organisational money on any project based onpersonal opinion or sentiment


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It can be the IT general control providing generalcontrol over the IT environment (e.g. changemanagement, user and access management etc)

Or

The Application specific control providingautomated system-based controls over businesstransaction processing (e.g. system configurationsettings

THE BUSINESS CONTROL SYSTEMSSoftware and IT infrastructure


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THE BUSINESS CONTROL SYSTEMSInternal and external audit

This involve all the internal control, audit reconciliationsystems put in place that provides checks and balancesfor the financial operation of the health and social care

organisation. It also include external audit byprofessional accountant

Others include: Forecasting and monitoring Regulatory Framework Other basic software for monitoring financial

information within an organisation


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References Anthony R.N and Young D.W (1999) Management Control in Non-profit

Organisation. 6th Ed. McGraw-Hill

Broadbent M. and Cullen J. (2003) Managing Financial Resources. 3rd Ed.Routledge

CIMA (2005) Official Terminology. CIMA Publication.

MONITOR (2013) Approved Costing Guidance. Available at:http://www.monitor.gov.uk/sites/default/files/publications/6JuneResissuedApprovedCostingGuidanceToPublish.pdf

NHS (2012a) Procurement of healthcare, What are the procurement options?.Commissioning Development Directorate. Available at

http://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdf

Rajasekaran V.; Lalitha R. (2010) Cost accounting. Pearson Education India.Available online athttp://my.safaribooksonline.com/book/accounting/9788131774991
http://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://my.safaribooksonline.com/book/accounting/9788131774991http://my.safaribooksonline.com/book/accounting/9788131774991http://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdfhttp://www.england.nhs.uk/wp-content/uploads/2012/09/procure-brief-2.pdf

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Costing Princples and Business Control Systems (Assessement Criteria 1.1)