Assessment criteria 1.

1
Aim

At the end of this session, learner should
be able to explain the costing
principles and the business control
system in health and social care
organisations
Introduction to Costing
According to the official terminology of CIMA (2005),
it defined Costing as the technique and process of
ascertaining cost. These costing techniques comprise
principles and rules to ascertain cost of products or
services.

Rajasekaran and Lalitha (2010) defined cost as the
amount of resource used in exchange for goods or
services. The resources used can be money or moneys
worth, which is usually expressed in monetary units

CIMA (2005) Official Terminology. CIMA Publication; Rajasekaran V.; Lalitha R. (2010) Cost accounting. Pearson Education India
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 be
500

Health and social care managers need to understand
how to ascertained and determined this cost

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

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 to
estimate the cost, such as a medical test, a care visit, or
a medical procedure.

Indirect costs cannot be traced to a given cost object
without resorting to some arbitrary method of
assignment.

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, it
does not change in response to changes in the level of
activity. A variable cost is one that changes in response
to changes in the level of activity, it changes in direct
proportion to the volume of activity, that is, doubling
the level of activity will double the total variable cost.
(Broadbent and Cullent , 2003)

To illustrate this concept, we will use the example of
running a care home
Broadbent M. and Cullen J. (2003) Managing Financial Resources. 3rd Ed. Routledge
The cost of licensing a care home is fixed for a
particular period of the licensing regardless of the
number of resident in the care home, likewise the
cost of rent of the building will remain fixed for
the 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 these
cost will vary directly with the number of resident
in the care home.

Semi-variable and semi-fixed cost


Semi-variable cost includes both a fixed and a
variable element. For example, a telephone bill
contains 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; then
when the activity increases still further the cost will
take a step upward.

For example, a care supervisor/manager, up to
certain level of activity in the care home one
supervisor/manager is sufficient.

However, if the activity and therefore the
number of resident been cared for increases,
it will probably be necessary to employ
another care manager.
How costing principles are used in Health and Social care
Costing can be use by the government and its health agencies
in determining the cost of contract / procurement for local
health 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 health
service from a provider. It also assist the government in
planning for the local community on how much it will cost to
provide 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

Competitive tendering (CT)
Outsourced services obtained through price competitive
tendering might cost less, but profit becomes more
important than value in the return on investment in
services run by the private sector on the NHS behalf

Any Qualified Provider (AQP) scheme, are now set to
become key instruments for commissioning NHS
services in England. Members will need to understand
what these terms mean and how their services may be
affected



Break even Analysis:
Break-Even Analysis is an expected component of
most business plans, especially for start-up companies.
It shows how much revenue you need to cover for both
fixed and variable costs.

Cost information and cost benefit analysis are
frequently used by health and social care
organisation to monitor cost and make decision
about expenditures. Cost data are very useful in
budget preparation and forecasting for the
financial year

Providers use cost data to manage services and
improve operational efficiency. Cost data is also
used to support the development of pricing and
currency design for reimbursement purposes

THE NHS APPROVED COSTING GUIDIANCE

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

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

The Approved Costing Guidance sets out the approach to
costing that Monitor encourages providers of NHS-funded
services to adopt

MONITOR (2013) Approved Costing Guidance. Available at:
http://www.monitor.gov.uk/sites/default/files/publications/6JuneResissuedApprovedCostingGuidanceToPublish.pdf
The six costing principles approved by the NHS
Principle 1 Stakeholder engagement
Effective costing requires input from a wide range of
stakeholders, including non-finance staff.

Principle 2 Consistency
For some costing purposes, a consistent approach is
required across or within organisations.

Principle 3 Data accuracy
Accurate costing relies on the quality of the underlying
input data.

The six costing principles approved by the NHS (contd)
Principle 4 Materiality
Costing effort should be focused on material costs and
activities.

Principle 5 Causality and objectivity
Costing should be based on an understanding of
causality to minimise its subjectivity.

Principle 6 Transparency
Costing should be transparent and auditable

THE BUSINESS CONTROL SYSTEMS
The purpose of business control systems is to
ensure that organisation carries out its
strategy; in making sure that resources are
obtained and used efficiently (Anthony and
Young, 1999). It also provides a framework of
processes and activities designed to reduce
the risk of error or fraud.


Anthony R.N and Young D.W (1999) Management Control in Non-profit Organisation. 6th Ed. McGraw-Hill
THE BUSINESS CONTROL SYSTEMS - Budgeting
The budget set the tune for managers in managing
financial resources. It compels, coordinate, motivate,
communicate, motivate and evaluate the performance
of health care managers.

With budgeting, managers have a clear boundary on
how much is set for each project and as such they cant
spend organisational money on any project based on
personal opinion or sentiment
It can be the IT general control providing general
control over the IT environment (e.g. change
management, user and access management etc)

Or

The Application specific control providing
automated system-based controls over business
transaction processing (e.g. system configuration
settings

THE BUSINESS CONTROL SYSTEMS Software and IT infrastructure
THE BUSINESS CONTROL SYSTEMS Internal and external audit
This involve all the internal control, audit reconciliation
systems put in place that provides checks and balances
for the financial operation of the health and social care
organisation. It also include external audit by
professional accountant

Others include:
Forecasting and monitoring
Regulatory Framework
Other basic software for monitoring financial
information within an organisation

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/6JuneResissuedAp
provedCostingGuidanceToPublish.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 at
http://my.safaribooksonline.com/book/accounting/9788131774991