Critically analyses the concepts, features, and importance of costs and accounting in making decisions in health and social care
Cost accounting is a method used in accounting to capture a company’s or organisation’s production costs. It assesses the input costs of every step in production, fixed costs like depreciation of capital equipment. Cost accounting measures and records costs individually then compare the input results via output result. The outcome results will help the organisation to measure its financial performance. Cost accounting allows managers in determining which departments, production unit or service are the most profitable and which ones need improvement.
Cost accounting determines the fixed costs ( expenses incurred each month despite the level of production for example rent, depreciation, and interest on loans) and the variable cost. Variables costs are expenses that fluctuate due to changes in production for example supplies, maintenance expenses and cost of labour. Fixed and variable are interdependent because the more the products produced the more the fees.
Cost accounting determines the breakeven point between the fixed and variable cost. The break-even point gives the profit of the organisation or company.
The development of Cost Accounting
According to scholars, cost accounting was first developed during the industrial revolution. The industrial revolution saw the emergence of the economics of industrial supply and the demand forced manufacturers to reduce the price of their stocked goods or decrease production. By the 20th century, cost accounting was widely used in business management.
Examples of Cost Accounting
There are four types of cost accounting. They include the following;
Standard Cost Accounting
Standard cost accounting is a widely used method by organisations and companies because of its simple to use. The conventional cost method compares the labour and materials used in production with what was required under a standard condition. For example labour and material costs. The outcome will be a standardised cost accounting system. Few problems will arise if the Actual and standard situation is similar
Using Standard cost accounting method can harm performance evaluation of employees. For example, when a manager increases inventory to increase production and an increase in production will lead to a rise in operating costs. If the changes do not yield positive results the manager is responsible for the losses although he might not have controlled the production problem.
Activity Based Costing
The activity-based costing involves the allocation of costs to identified activities of an organisation and from the events, it is assigned to the products and services. Steps in implementing Activity Based Costing
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Lean accounting was developed by in line with the lean manufacturing and production by the companies in Japanese in the 1980’s. Lean accounting primarily focuses on employees and learning. Lean tools, practices, and methods are used. Employees master their work, solve the right challenges and assist the company to do things that may be a be a challenge to address in future. Lean accounting creates an improved financial management practice, creates a standard work through employees and creates time for the right project.
Marginal costing is also known as cost volume profit analysis and it analyses the relationship between an organisation’s products, cost of production, profits, expenses, and volume of sales. The link is known as contribution margin and it is calculated by the difference in variable expenditures from revenue and dividing the remains by the tax.
The results give the management potential profits and profitable sales and which market is needed.
Cost accounting in health and social care organisation has often been considered too complicated and expensive. Today the health and social care organisation are undergoing tremendous pressure from the society and the government to lower the cost of health care.
It is, therefore, necessary to adopt and implement cost accounting system in health and social care. The importance include the following;
Manage Labour costs
Cost accounting in health and social care helps control idle time and ensures workers finish their work in the stipulated time frame. The management can analyse the time spent by each worker and determine the wage rate per job. This helps the control in better allocation of best suitable jobs for employees and promote efficiency. Overhead costs
Health and social care organisations incur indirect costs like laundry and cleaning services, office services, among others that are part of the production. By applying cost accounting into the overhead costs will help keep a check on the use and control supply thus aid in the management of the organisation.
Cost accounting gives information on standard and actual performance of all activities in the organisation. For example, the hospital administration can know weekly expenses and can plan the costs of running the day to day activities.
Helps in Budgeting
Proper budgeting is a function of cost accounting. When applying cost accounting in health and social care prog
Ram organisations can estimate their budget performance and manage activities without an overspent.
Creates Room for Expansion
With a well-managed budget through cost accounting, organisations can expand their production or service from the savings made through control of expenses and resources.
The management in health and social care can analyse each unit cost and give the cost of production. By comparison of values, the organisation can determine it’s selling price for example loss of drugs, operations and consultation fees for its customers.
Guide of Profitable Products
Cost accounting helps in improving the overall performance of an organisation because it analyses each unit of production. The organisation can use the results to determine their most profitable activity or product and choose to promote which product that is the most useful and avoid those that bring losses.
Cost accounting helps minimise the misappropriation of supplies and identifies expired supplies. Cost accounting focuses on materials allocated to departments, jobs, and unit of production thus there is maximum utilisation of resources in the organisation.
In conclusion cost accounting is the best tool for pointing out the efficiencies and inefficiencies in an organisation. It analyses each unit that is beneficial to employees and management. Health social organisations can plan and make an amicable decision in their delivery of service.
Apply tools of costing design and costing systems to health and social care organisations
Vision 2030 and sustainable goals in Health and social care aim at developing capital budgets that will meet the challenges in the future. Health and social responsibility are most priorities in many countries and take the largest share in national budget allocation. In some cases due to the demands of other sectors health and social care are given the least budgets to work on.
For such situations managing and controlling costs is more difficult. The complexity of modern health and social care, for example, a health institution may comprise of ambulance department, inpatient and outpatient services, staff members, and consultants of multiples cadres within the organisation. With such a significant service provision cost of care is essential. In healthcare different accounting approaches are used based on the needs of the institution.
These tools of costing design include relative value unit(RVU), activity-based management, time-driven activity-based costing, target requiring balance scorecards and the ration of cost to charges.
Relative Value Unit
The relative value unit was established by Medicare in the United States to determine payment, collected and aggregate direct cost from within the hospital setting. The relative value unit calculates the work done by a physician, overhead costs, and insurances. It is mainly used to evaluate potential fees, analyse contracts and determine compensation for a physician in a healthcare organisation. To calculate the relative value the total operating costs and data volume are used.
Traditional costing allocates institution overhead cost to a specific output based on a cost driver. Traditional costing is widely used and it requires minimal financial and managerial investment. However, there are few challenges with the technique. Reports conclude that current cost does not account for the differences in the service line, produces an inaccurate representation of true product value.
The ABC( Activity Based Costing) system of accounting helps healthcare organisation to identify costs, develop appropriate prices and determine the variance providers in the improvement of standardisation. For example in the united states, Froedtert Memorial Lutheran Hospital, the surgery department revealed that the ABC method determines the cost of activity and prices accurately.
The ABC application in health institution needs the ability to quantify actual cost of activities, identify overall expenses and profits of operations
ABC system helps promote organisation performance by providing competitiveness, profitability, and productivity. The ABC has steps to its implementation. They are
- A steering committee comprising of all cadre
- Major activities in the organisation promote the need to be identified
- Costs are assigned to each activity
- The cost driver for each event is determined
- According to demand, the values of activities are attached to the products
- Staff members need to be educated on ABC
- The data collected needs to be evaluated and interpreted
The ratio of costs to charges (RCC’s)
In health and social care, the rate of the expenses to charges is used to estimate the value per department. Hospital pair cost of departments for the services provided and compute the ratios to charges. The outcome will be the cost per department. Using RSS is simple and no financial resources nor extra human resource is needed.
Recommendation on improvement on costing and pricing systems of health and social care organisations.
Despite challenges in the use of cost accounting, it is a worthy effort in health and social care management. Cost accounting helps in budgeting, controls costs, measures activities, evaluate the performance of an organisation and results to right economic choices instead of observing. Cost accounting is necessary for improving efficiency in healthcare. Most health and social organisation have not implemented cost accounting techniques due to limited funds and lack credible data. Without reliable data it is impossible for the health and social; organisations to manage their operations and transforming the health and social care industry.
Understand the financial performance of health and social care organisations
Critically analyse financial statements to assess the financial position of health and social care organisations
A financial statement is defined as a process of reviewing and examining an organisations’ accounting performance to know it’s past, present or projected future performance. Evaluating performance will create better economic decision making of the firm. Financial statements also help to identify possible problems that may arise in the company and address them early.
Users of Financial statements analysis
There is an internal and external user of a financial statement. The internal users include the management who make decisions related to operations of the organisation while external users may not necessarily belong to the organisation but have financial interest for example investors, creditors and the general public.
Healthcare and social care organisations use two main methods of analysing their financial statements. These are horizontal/trend analysis and vertical analysis
The horizontal analysis compares historical financial information in a healthcare organisation over a number of the reporting period. The aim is to establish high or low numbers in comparison to records which may be of any concern. The horizontal analysis groups information and sorts them by weeks, months, or years. The parallel analysis may sometime be called dynamic or trend analysis.
An example that may need a horizontal scan is when expenditure in a year is high compared to the previous year. This may cause an investigation on what caused the change in price. The answer may be due to price fluctuation or difference in the quality of raw materials.
The advantage of using horizontal analysis in healthcare financial statement is that operational activities can be seen during the period being reviewed and comparison of the previous years can be analysed. The disadvantage of using horizontal analysis is that it may give variances, especially when compared across periods of time. Changes maybe to inflation, different needs and preferences of the organisation and increase in workforce.
The vertical analysis looks at the financial statement for a single time usually for a year. Every item on the income and loss statement is expressed as a percentage of the gross sales while on the balance sheet it is shown as a percentage of the total asset of the organisation. Vertical analysis is also called static analysis.
The advantage of vertical analysis is that it requires the report of a single reporting period. The vertical analysis can be useful in the departmental performance comparison. The disadvantage of this technique is, it cannot compare different financial years, months, or weeks. If there are changes in the performance in a particular period over the previous period then both vertical and horizontal analysis will be utilised to answer the difference in production or sales.
Financial Statements in health and social care
The health and social care use three main types of financial statements. These are
- Balance Sheet
- Income statement
- Statement of cash flow
The Balance sheet gives the financial position of an organisation. The layer has two sides, one showing the assets of the organisation while the second side shows the liabilities and equity of shareholders. At all-time, the two teams must balance because of Assets =Liabilities + shareholders equity. The main items on a balance sheet include current assets, Long-term assets (for example equipment), current liabilities, long-term liabilities ( for example loans) and equity shares.
The Income statement reports on the revenues and expenditures incurred of the organisation over a specific period. The period can be weekly, monthly, or yearly. Major components in an income statement include net income, sales revenue, and net profit.
Statement of cash flow shows the sources of cash and how the money is utilised in an organisation. The report of cash flow shows changes in capital coming from, used by whom or what activity, any investment, and financing activities of the organisation.
Other critical statements like business and reporting review are shared in a healthcare organisation. For example recent events, and if there are any plans for the expansion of the organisation is discussed.
Changes in shareholding in organisations may change anytime thus it is important to keep stakeholders into the picture on what is the equity share of the organisation. A reconciliation of the equity opening accounts with the closing shareholders equity is analysed.
In conclusion financial statement analysis an excellent tool to understand past performance of a healthcare organisation and it can predict future performance. However, health and social care organisation should be aware there are operational constraints like backlogged orders, and changes in the work environment thus should not be analysed blindly.
Evaluate financial statements using financial ratios for improved information in decision making in health and social care organisations.
Evaluation of financial statements gives a background check on how employees have performed, which department has played well and predict the general capacity production of the company. To analyse a company performance financial data is a need. There are many sources of data. For example, data can be drawn from the annual income statement, balance sheet and statement of cash flow. Other causes can be through the gross domestic products, consumer price index, market data, and economic data that are useful in assessing the prospects of an organisation.
The evaluation of financial ratio is a comparison between financial information and another. For example, the correlation between current assets and current liabilities is known as the current ratio. A proportion are classified according to
- Coverage Ratio measures a firm’s ability to meet the particular obligation
- Return Ratio measures the net benefit, relative to the resource disbursed
- Turnover Ratio measures the gross profit relative to the supply disbursed
- Component Percentage is a ratio of a component of an item to the item
Financial performance and condition of an organisation can be evaluated using six aspects. These are
Liquidity ratio gives information on the organisation ability to meet its short-term and immediate obligations by use of assets that are converted into cash. The converted holdings into money are known as liquidity asset and are listed in financial statements as current assets. Often the current assets are the working capital of an organisation and are used to satisfy short-term obligations or current liabilities.
When current assets exceed current liabilities net working capital is formed. By determining the liquidity ratio, a company can find its operating cycle. The operating cycle is the period it takes to convert an investment inventory back to cash. The cash will be gotten through a collection of sales. The operating cycle helps organisations to determine how long the company will take to get cash back from its investment in assets
Profitability ratio provides the companies with information on the amount from each sale it makes. It compares the income and sales. Profit ration determines how much a company makes form each dollar of sales thus it determines whether there is a profit or loss.
The management team can articulate productive activities and those that bring up losses. The profitable ratio is calculated by gross profit margin = gross Income over the sales.
The activity ratios measures how well organisation assets are used. It targets how great assets perform in the form of benefits. Organisations can gauge how well are the investment performing and whether to add more based on the assessment report. The higher the turnover the better the performance of the company.