HPI4007 Financial management
Case 1: Cost price calculations and tariffs
Different types of costs
(Health) economics: cost = opportunity costs (value of alternative benefits sacrificed)
(Financial) management: cost = accounting costs (monetary value of production inputs)
Cost ≠ expenses
Cost-prices ≠ (market) prices
Je hebt prijs die je betaald voor iets in de winkel en je hebt een prijs die je betaald als je het geen
dat je koopt in de winkel zelf zou produceren. Er is een verschil, omdat bedrijven winst willen
maken = kost prijs en marktprijs.
Costs price only includes costs made for production.
Market price also includes demand, wish for profit.
A tariff is the price set by a system. For example A-segment in Dutch hospital care. It is set by the
government.
Costs are important, because of:
Planning: e.g. to estimate unit-cost price and financial results
Evaluation and control: e.g. to monitor financial performance
Decision-making: e.g. to set market prices, to decide on investments
Types of costs (based on the production inputs):
Costs can be defined as the value of the resources used in the production of an item or service.
Types of costs indeling 1: total costs, marginal costs, average costs
Total costs: The total costs of all resources: Thus the fixed, variable, semi-variable and
stepped costs of a particular level of activity. Once identified and analyzed all of
the different costs, you can work out the total costs at a given level of activity.
Marginal costs: A costing approach recovering the variable cost of a service. It is the additional
cost of producing one more unit. Or the reduction in cost from producing one
less.
Is intended to recover the variable costs of providing services. The problem with this
approach is that a large proportion of the costs –the fixed costs – are not considered in
pricing decisions.
Equal to variable costs, as long as the relationship is linear between the total cost and the
production.
Average costs: The basis of pricing (total costs / quantity)
Top-down costing: an approach based on average costs.
Includes also fixed costs, so variable costs per unit + fixed costs per unit.
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, HPI4007 Financial management
Types of costs indeling 2: Direct costs, indirect costs, overhead costs
Direct costs: Directly attributable to the product/service. Resources used in the design,
implementation, receipt and continuation of a healthcare intervention.
The costs of resources used directly by the service, e.g. nurses, doctors, drugs, gauze
bandages, drainage bags.
Indirect costs: Not directly attributable to a cost object. The value of resources expended by
patients and their careers to enable individuals to receive an intervention.
The service provided by support units, such as radiology and catering; indirect costs are
related to resources that are common to many clinical treatments and which are normally
supplied centrally too many users.
Can be divided in overhead and capital costs.
Overhead costs: These are costs that are not incurred directly from providing patient care but
are necessary to support the organization overall, such as central management,
security, and accounting and housekeeping.
Indirect costs and overhead costs are shared resources. So you need to identify what part of these
resources is consumed by the costs center you are looking at.
Direct costs can be allocated directly (cost allocation); shared costs need to be apportioned (cost
apportionment). Apportioning shared resources requires some information on the distribution of
resource use and costs across cost centers. Where the costs of physical resources is being apportioned
this may be on the basis of flow space occupied, time spent or some other basis.
Types of costs indeling 3: Fixed costs, variable costs, semi-variable costs, stepped costs
Fixed costs: A cost of production that does not vary with the level of output.
Costs those which stay constant with changes in activity over a period of time (on the long
run, these costs can vary like increased rent). The costs of resources which must be paid
before any activity occurs but which stay fixed as activity increases are fixed costs.
Examples: staff salaries (of permanent staff), buildings’ maintenance.
Variable costs: A cost of production that varies directly with the level of output.
Change simultaneously with activity. When activity increases, costs go up; and vice versa.
Examples: costs of meals (which will change in direct proportion to the number of beds
occupied), drugs issued (under a relatively stable case mix, will vary in proportion to the
number of patients treated).
Semi-variable costs: Costs that contain both a fixed and a variable element (mixed-cost).
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Case 1: Cost price calculations and tariffs
Different types of costs
(Health) economics: cost = opportunity costs (value of alternative benefits sacrificed)
(Financial) management: cost = accounting costs (monetary value of production inputs)
Cost ≠ expenses
Cost-prices ≠ (market) prices
Je hebt prijs die je betaald voor iets in de winkel en je hebt een prijs die je betaald als je het geen
dat je koopt in de winkel zelf zou produceren. Er is een verschil, omdat bedrijven winst willen
maken = kost prijs en marktprijs.
Costs price only includes costs made for production.
Market price also includes demand, wish for profit.
A tariff is the price set by a system. For example A-segment in Dutch hospital care. It is set by the
government.
Costs are important, because of:
Planning: e.g. to estimate unit-cost price and financial results
Evaluation and control: e.g. to monitor financial performance
Decision-making: e.g. to set market prices, to decide on investments
Types of costs (based on the production inputs):
Costs can be defined as the value of the resources used in the production of an item or service.
Types of costs indeling 1: total costs, marginal costs, average costs
Total costs: The total costs of all resources: Thus the fixed, variable, semi-variable and
stepped costs of a particular level of activity. Once identified and analyzed all of
the different costs, you can work out the total costs at a given level of activity.
Marginal costs: A costing approach recovering the variable cost of a service. It is the additional
cost of producing one more unit. Or the reduction in cost from producing one
less.
Is intended to recover the variable costs of providing services. The problem with this
approach is that a large proportion of the costs –the fixed costs – are not considered in
pricing decisions.
Equal to variable costs, as long as the relationship is linear between the total cost and the
production.
Average costs: The basis of pricing (total costs / quantity)
Top-down costing: an approach based on average costs.
Includes also fixed costs, so variable costs per unit + fixed costs per unit.
1
, HPI4007 Financial management
Types of costs indeling 2: Direct costs, indirect costs, overhead costs
Direct costs: Directly attributable to the product/service. Resources used in the design,
implementation, receipt and continuation of a healthcare intervention.
The costs of resources used directly by the service, e.g. nurses, doctors, drugs, gauze
bandages, drainage bags.
Indirect costs: Not directly attributable to a cost object. The value of resources expended by
patients and their careers to enable individuals to receive an intervention.
The service provided by support units, such as radiology and catering; indirect costs are
related to resources that are common to many clinical treatments and which are normally
supplied centrally too many users.
Can be divided in overhead and capital costs.
Overhead costs: These are costs that are not incurred directly from providing patient care but
are necessary to support the organization overall, such as central management,
security, and accounting and housekeeping.
Indirect costs and overhead costs are shared resources. So you need to identify what part of these
resources is consumed by the costs center you are looking at.
Direct costs can be allocated directly (cost allocation); shared costs need to be apportioned (cost
apportionment). Apportioning shared resources requires some information on the distribution of
resource use and costs across cost centers. Where the costs of physical resources is being apportioned
this may be on the basis of flow space occupied, time spent or some other basis.
Types of costs indeling 3: Fixed costs, variable costs, semi-variable costs, stepped costs
Fixed costs: A cost of production that does not vary with the level of output.
Costs those which stay constant with changes in activity over a period of time (on the long
run, these costs can vary like increased rent). The costs of resources which must be paid
before any activity occurs but which stay fixed as activity increases are fixed costs.
Examples: staff salaries (of permanent staff), buildings’ maintenance.
Variable costs: A cost of production that varies directly with the level of output.
Change simultaneously with activity. When activity increases, costs go up; and vice versa.
Examples: costs of meals (which will change in direct proportion to the number of beds
occupied), drugs issued (under a relatively stable case mix, will vary in proportion to the
number of patients treated).
Semi-variable costs: Costs that contain both a fixed and a variable element (mixed-cost).
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