Cost Accounting

Terms in Cost Accounting

Cost : Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services.

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Cost Centre : Any unit of Cost Accounting selected with a view to accumulating all cost under that unit. The unit may be a product, a service, division, department, section, a group of plant and machinery , a group of employees or a combination of several units. This may also be a budget centre

Advantages of Cost Accounting

Reveals un-profitable activites,losses or inefficiencies Finding the causes for Decrease or Increase in Profit or Loss Furnishes data and Information to management

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 Classification of cost is the arrangement of items of costs in logical groups having regard to their nature (subjective classification) or purpose (objective classification).

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Basis of classification
i) Nature of expense -Material Labour Expenses ii) Relation to object traceability -Direct Indirect

iii)Functions / activities Production, Administration ,Selling

Distribution ,Research &Development iv) Behavior -fixed, semi-variable or variable

v) Management decision making -Marginal Differential

Opportunity Cost Replacement Cost Relevant Sunk Cost Imputed Cost Normal Cost Abnormal Cost Avoidable Cost Un-avoidable Cost vi) Production Process Batch Process Operation Operating Contract Joint vii) Time period-Historical Pre-determined Standard Estimated
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Basis of classification
i) Nature of expense -Material Labour Expenses ii) Relation to object traceability -Direct Indirect iii)Functions / activities Production, Administration ,Selling Distribution ,Research &Development iv) Behavior -fixed, semi-variable or variable v) Management decision making -Marginal Differential Opportunity Cost Replacement Cost Relevant Sunk Cost Imputed Cost Normal Cost Abnormal Cost Avoidable Cost Un-

avoidable Cost
vi) Production Process Batch Process Operation Operating Contract Joint
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Sunk Cost
A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the future.

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Differential cost
is the difference between the cost of two alternative decisions, or of a change in output levels. The concept is used to reach decisions about which alternatives to pursue, and which to

drop. The concept can be particularly useful

in step costing situations, where producing one additional unit of output may require a substantial additional cost.
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Financial management definition

It is the art and science of managing money The most essential requirement of any organized business or activity The process of procuring and judicious use of resources with a view to maximize the value of the

firm
Interdependence with other areas of management
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1.

Basic finance literacy

Income and expenditure statement

2.
3. 4.

Cash flow: outgoing, incoming

Balance sheet: final accounting item (what the practice is worth) Budgeting: a process of estimation of income and expenditure

5.
6. 7.

Assets
Liabilities Capital
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Balance Sheet
A statement of assets, liabilities and capital on a given date Assets: Fixed: land, building, equipments etc

Current: Cash in hand or in bank, stocks, debtors

Liabilities

Long term: Loans > 1 yr

Current/ short term: overdraft, taxes Capital= Assets -Liabilities
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Some core issues

Budget

Accounting
Cost Accounting

Break even point

Cost benefit analysis

Cost reductions and containment

Day to day activities
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Budget
An important instrument of the financial management

used as aid in planning, programming and control

A budget may be defined as a financial and quantitative statement, prepared and approved prior to defined period of time, of the policy to be pursued during that period for the purpose of achieving the given objective.
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Budget: advantages
It is a tool for -

a)
b) c) d) e)

Quantitative expression of the planning

Evaluation of financial performance in accordance with plans Controlling costs Optimizing the use of resources Directing the total efforts in to the most profitable channels
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Planning & preparing budget

Well in advance
An opportunity to plan expansion or improving services , hence involve staff and all departments Plans must be realistic
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Types of budget
Importance :Understanding of various types of budget can indirectly help us understand various methods of finance management 1. Project budget : probable expenditure and likely revenue for a specific project 2. Departmental budget
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Types of budget
3. Operating revenue budget- related to volume of work anticipated

4.

Operating expenditure budget: recurring expenditures for operation and maintenance of services e.g. salaries and wages, supplies, support utilities, maintenance
Capital budget ( non recurrent ): meant for growth ( new facilities), replacement of obsolete. Needs are many prioritize

5.

6.

Cash budget : provision for anticipated cash expenditures , for planning the cash flow e.g. salaries, bills etc.
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Accounting
An art of recording , classifying and summarizing
data in a significant manner and interpreting the

results
Data may be in form of money transactions and events which are, in part at least , of a financial character
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Types of accounting
1. Financial accounting: documentation of facts,
daily transactions 2. Cost accounting : expenditure for a particular service 3. Management accounting : Analysis and interpretation of financial information for management purpose
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Nomenclature
a) Costing: to find out money spent on a service

b)

Cost center: an allied group of activities in a hospital

eg laboratory, immunization, laundry service

c)

Cost object: anything for which separate measurement of cost is desired e.g. rooms, OT, ICU, equipment

d)

Cost unit: a measurable detail of service rendered e.g. linen, laboratory investigation
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Categories of expenditures
Important in understanding dynamics of costing 1. 2. Capital Vs Recurring Fixed Vs Variable Fixed : Remains unchanged despite changes in related level or volume of activity e.g. salary of permanent staff

Variable volume dependent, varies in proportion to

changes in level of activity e.g. medicines, consumables, power cost
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3.Direct vs indirect expenditures

Direct : Clearly linked to a service
Indirect: can not be clearly linked to a particular cost object e.g. administration cost,security cost
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Objectives & advantages of costing

1.
2.

To get clear picture of financial situation

Identifying profitable and non profitable segments and taking action accordingly

3. 4.

To decide pricing of services and discounts To decide for out sourcing of services
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Advantages of costing
5. Helps in entering into agreements with TPA, corporate clients etc 6. Helps in identifying wastages 7. Helps in budgeting, planning
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Effective cost accounting

1. Proper records 2. Proper segmentation of costs 3. Sound accounting practices,regularity 4. Record of utilization of equipments 5. Record and analysis of man power utilization
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Difficulties in cost accounting

1. Many inputs have to be considered e.g. labor,
material, depreciation,

2.
3.

Every transaction has to carry a price tag

Variation in quality of service e.g. consultant to consultant, patient to patient
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Break - even analysis

Volume of activity at which total income just equals total variable and fixed costs Lower break even point is more desirable e.g. bed occupancy 60% Vs 80% Advantages: Equipment selection and purchase decision, formulating price policy
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Cost - benefit analysis

An economic technique and formalized way
of comparing the cost and benefit of

undertaking an activity / project

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Expenditure - containment and cost - cutting

Sound economic sense It does not mean compromising quality Promote awareness amongst staff Practice cost monitoring: analyze actual expenditure against budget and standards , find reasons for

1. 2.

variations, work on them

3. Cost management: establish systems with responsibility and accountability
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4.Strategies for expenditure control

a) Decrease the cost of inputs relative to outputs:
materials, man power

b)

Increase output relative to input: scheduling of

procedures, automation , remove bottle - neck in the flow of services
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5.Cost saving areas

a) Streamlining of services e.g. laboratory, OT, indoor

b)
c)

Purchases : planning, budgeting, bargaining, group

purchasing Preventive maintenance AMCs, back ups

d)
e)

Planning stage: quality manpower and machines,

planned recruitment, up gradation Good accounting practices: automation, internal audit

f)

Energy audit
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Investments
We work hard to make money, but learn to make your money work for you Daily wage earners

Save, invest, build wealth, spend, give it away

Invest some percentage in improving services,

facilities
Stagnation without growth
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Personal investments
Required for future expansion and growth Commitment to the financial needs of the family Retirement planning

Building wealth.
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Various investment avenues

1. Real Estate

6. Equity
7. ULIP

2. Gold and Jewellery

3. Government
Securities 4. Company Deposits 5. Mutual Funds

8. Bank & company

FDs

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Some tips on day to day activities

1.Accounting

a)
b) c) d)

Financial memory of practice

Matter of self discipline Meticulous record of financial transactions - legal requirement e.g. Form 3c Employ accountant - good documentation and reports generation

2. Computerization 3. Periodic meetings with CA

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4. Handling cash
Staff handles lot of cash Doctors are too busy to supervise Easy temptation Introduce checks and balances - ensure strict cash control

Cash collection at counter (many advantages )

Minimize temptation for staff
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Tips
5. Deposit cash in bank daily or twice weekly

6.

Have 2 distinct streams of cash flow

Cash inflow deposit daily Cash outflow by withdrawal

7. 8. 9.

Make schedule for making payments Documentation support for all payments Filing system: cash memos, paid bills, pending bills
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10. Get personally involved for big transactions

Tips
11. Reconcile bank statements
12. Do not allow anyone to take records home 13. To your staff, demonstrate your awareness about what is going on and that you are careful about money
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14.Handling search and seizure

a)
b) c)

Keep your cool

Call your best friends as witnesses Know your rights

d)

Prevention is better than cure

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Thanks

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