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Summary All tasks financial management
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SUMMARYTASK 1: cost-price calculation:
Costs and types of costs:
Why:
- Planning: estimate unit cost price and financial results
- Evaluation and control: to monitor financial performance
- Decision-making: market prices/ decide on investment
Types:
- Opportunity costs: value of next best alternative. Hard to use and quantify, but very
important. Prices can reflect society’s opportunity costs: when good functioning
market, trade-offs can be made, but needs strong competition and sane consumers.
- Financial (management) (budgetary) costs: costs for original (historical) amount paid
for service or good. Also monetary value of resources. Accounting perspective =
integrated = absorption:
1. Total costs: Q X TC (per unit of times)
2. Fixed costs: costs that do not change if volume or activity changes
depreciation (capital related), (operating:) supervisory salaries, maintenance.
Can’t be avoided in the short run. When Q = 0, fixed = total.
3. Variable costs: change in response to changes in volume or activity.
Proportional. Is the total costs – fixed costs. When Q = 0, VC = 0. In the long
run, all costs are variable. Supplies etc.
4. Mixed costs (or semi-variable / stepped costs): variable + fixed element: base
salary + bonus, new machine use or hiring an extra person.
5. Direct: direct attributable to product: costs of materials, salaries, equipment.
6. Indirect: not direct attributable to product: are allocated to cost object on some
basis.
7. Overhead: grouping expenses that are necessary to continued functions of the
business, but do not necessarily generate profits rent, gas, electricity and
wages.
Fixed Variable
Direct Product line workers Raw materials
Physicians
Labour
Indirect Depreciation of production Electricity production
machine machine
Supervision manager wages
How to classify:
- Vary with Q? Fixed / variable
- Relation of cost to production? Direct / indirect
- Unit of analysis? Direct / indirect
- Time frame? Fixed / variable
, - Who bears the costs? Cost / prices
Marginal / incremental costs: additional cost of producing 1 more unit or reduction in costs
of producing 1 less. = change in TC / change in Q. Difficult for stepped costs not
proportional.
Profit rises when MC is lower than price. ST decision-making tool. When relation between
TC and Q is linear, MC = constant, but mostly:
Only variable costs.
Average costs: TC / Q. Also fixed costs. Tells whether you’re making money overall. For
make-or-buy decisions. Net result = revenues – costs. Average result per unit = (R-C) / Q =
unitary price – average cost per unit. Mostly decreasing due to economies of scale: fixed costs
are spread out. ATC at minimum = MC.
BEP: revenues = costs. Contribution margin = price (revenue per unit) – VC per unit =
covering fixed costs + increasing profits (per unit).
Unit costs price: direct + indirect costs per unit (fixed and variable). 3 types:
Full (integrated, absorbed) cost-price: per unit:
- Direct VC
- Direct fixed costs
- Indirect partly, so all indirect costs are covered in total.
Indirect cost allocation:
- Output based: only for homogeneous output: equally divided over volume.
- Input based: non-activity based allocation: surcharge method, percentage of use of
resource or staff or metres used.
- Process based: AB allocation: production-centre method: departments (number of tests
or operations). Or ABC: process steps.
- Others: non-activity based: weighted service (DRG), the best. Hourly rate (primary
care). Inpatient day (equally). Marginal mark-up.
Partial cost-price calculation: all or some of costs controlled by production unit:
- Direct VC
- Direct VC + FC
- Direct and some indirect costs
Cost per step in process or department. How: bottom-up: needs all costs, more detailed. Or
top-down: averages. Or combined.
Differential cost price calculation: additional costs of one / more extra units. If 1 then
MCprice.
Purposes:
- Full: LT pricing decision making and analysis
, - Partial: cost-control and ST pricing decisions
- Differential: investment decisions
Other:
- Target pricing: profit percentage on costs. Cost leadership (penetration pricing) vs.
monopoly practices (price skimming)
Transfer pricing: prices charged for output produced by one division and transformed to
another division, for performance, evaluation and efficiency. Price is from market, negotiated
or cost-based.
Market price decisions: influence on price is:
- Product: quality, features etc.
? Star
Market growth ^ Dog Cash cow
Market share
- Place: in HC trade-off between decentralization (responsiveness, o.a.) and efficiency.
- Promotion: increases with competition.
Types of contracts: prospective or retrospective.
- Block: fixed sum for defined service per year.
- Cost-volume: fixed price for defined volume of services
- Cost per case: for each item of service, usually with quality and targets for numbers.
Strong incentive to increase income.
Often combinations.
DRG: cost per case, weighted service, cost profiling, absorption costing.
- Base rate: reference value; average cost across all DRG’s is 1 = for example 2.000
euro. A particular DRG costs 2.0 = 4.000 euro. Calculated as average among all
hospitals. Can cost more or less for a particular hospital, due to efficiency, but that’s
the revenue it receives from insurance.
- Case mix index for entire hospital or certain department = average DRG of that
hospital or department = total cases X DRG1 + total cases for X DRG2, etc.
- Incentives to be efficient
- Side effects: when a complicated or expensive patient arrives, 2 things could be done
to undermine system:
1. Under-provision: cost shifting to other sectors of care or patient shifting to
other providers.
2. DRG creep (up-coding): providers misclassify patients to receive more
revenues. Insurance therefore does random checks of files.
Task 2: budgets:
Budget definition:
- Multi-part (operating) plan
, - The costs expected by a set of activities
- Revenues expected to cover these costs
Only a plan. No money in the bank is no expenses. Expect variance!
Tasks of manager with budget: planning, controlling activities, evaluating performance,
communicating plans, coordinate activities and motivate managers.
Master budget:
- Operating budget: predicting resources needed for production and their price to
estimate revenues (taxes, salaries, fees, supplies). Expense budget and revenue budget.
- Capital budget: large acquisitions such as buildings for balance sheet (LT). Why not in
cash budget: depreciating cost so longer use than one year, large costs so more need
for attention and often expensive so needs special financial arrangements as loans.
- Cash (flow) budget: forthcoming year: cash receipts + disbursements. Most vital.
Review on regular basis. Needs to have money at all times for expenses as salaries.
Types / forms of budgeting:
Budget type is decided by:
- Period
- Level of details
- Model
- Level of flexibility
- Forecasts
Level of flexibility:
Fixed: incremental or zero-based
Flexible: ABC: standards for costs for service/activities
Profiling is adjusting for seasons.
Advantages:
Incremental Zero-based Flexible
Simple to understand and Realistic Links activities to financial
calculate resources
Not much time to make Addresses historical Realistic
inefficiencies
Can also be used when Updates relation between Responsive to activity
income increases at a input – output variances
marginal rate
Organization establishes Higher accountability of
realistic financial and resource consumers
operational goals
Disadvantages:
Incremental Zero-based Flexible
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