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# Budeting & costing

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• We now move on to a discussion of different types of costs. Costs can be classified in many different ways, and these three distinctions are important for some of the examples and exercises we will use in this workshop. It is important to note that these categories are not mutually exclusive. A cost can be fixed and either direct or indirect. It is also important to point out that not all of these distinctions come into play in every cost study. The research question will dictate which of the definitions are useful for a particular analysis. Finally, there are other ways to classify costs that are not presented here. We have chosen to present the definitions that are most relevant to other material in the workshop.
• Next we’ll examine the distinction between fixed vs. variable costs. This distinction hinges on whether or not the cost is sensitive to small changes in output. Costs that do not vary with small changes in the amount of output are classified as fixed. In the short-run, many costs may be considered to be fixed. For example, if another patient comes to the clinic, we do not need to build a new exam room, buy another chair, or hire additional staff. Variable costs, on the other hand, are costs that do vary with the level of output produced. For our example of another patient coming to the clinic, we will need to use more supplies to provide service to this patient. All costs can be categorized as being either fixed or variable.
• Let’s practice categorizing costs as fixed or variable. The clinic building: is this fixed or variable? Why? (Answer: fixed) What about brochures given to clients? (Answer: variable, if more clients come, more brochures are required) A salaried community-based-distribution supervisor (person who supervises field workers) (Answer: fixed, a salaried worker does not get paid more if the number of clients served increases). A surgeon paid on a per-procedure basis? (Answer: variable, as the number of surgeries increases, the payments to the surgeon also increases)
• Another way of classifying costs is as direct or indirect. The use of the term here is more in keeping with accounting definitions. Direct costs refer to those resources specifically attributed to the production of a service or an intervention. These are the types of inputs that would be obvious if you were to observe the provision of the service. The “indirect” costs are those for other inputs which may or may not be observable but that are necessary to support the provision of the service. Often these items are referred to as “overhead” expenses.
• So let’s try and classify the following types of expenses into direct vs. indirect. Clinician salaries? (Answer: Direct) Administrative staff salaries? (Answer: Indirect, support the provision of service) Contraceptives? (Answer: Direct) Clinic Building? (Answer: Indirect)
• A final category of costs is joint costs. These are the costs of resources that are shared across different outputs. The best example of this is the labor cost of clinic personnel. They provide multiple services and yet the salary and benefits received are not linked directly to the different outputs. For example, if the physician from the previous example had been providing prenatal visits in addition to IUD insertions, then the physician salary would be a joint cost. Once a cost is identified as being a joint cost, the analyst must decide on a method of allocating the cost to the different outputs produced. We will finish this part of the workshop with a brief discussion of joint cost allocation.
• ### Budeting & costing

1. 1. <ul><li>Financial Management </li></ul>
2. 2. Health financing Problems? <ul><li>Lack of funds </li></ul><ul><li>Mal-distribution of resources </li></ul><ul><li>Rising cost of medical care </li></ul><ul><li>Wastage of resources </li></ul><ul><li>Inefficiency in spending </li></ul><ul><li>Lack of coordination </li></ul><ul><li>These problems generate the need for a strong financial management system in the health sector </li></ul>
3. 3. <ul><li>Every Government Official is accountable and responsible for proper utilization of government funds authorized by legislature and show proof of proper use of such expenditure.This accountability is the basis of Financial Management. </li></ul>
4. 4. What is Financial Management all about? <ul><li>Answers the basic questions:- </li></ul><ul><li>How to finance (fund) health care? </li></ul><ul><li>Where to invest in health care? </li></ul><ul><li>What is the outcome of investment in health care? </li></ul><ul><li>F.M. deals with the “procurement of funds and their effective utilization for the achievement of common goal of the organization.” </li></ul>
5. 5. Basic decisions under Financial Management <ul><li>Financing Decision </li></ul><ul><li>Investment Decision </li></ul><ul><li>Dividend Decision </li></ul>
6. 6. Financing Decision <ul><li>Deals with the procurement of funds from various sources </li></ul><ul><li>Sources of funds in the Health Sector </li></ul>
7. 7. Investment Decision <ul><li>Concerned with the effective utilization of funds in one activity or the other. </li></ul><ul><li>Types of investment decisions:- Long-term & Short –term. </li></ul><ul><li>Investment in the Health sector can be in the various forms: </li></ul><ul><li>Purchase of High Quality & sophisticated Medical Equipments. </li></ul><ul><li>Construction of hospitals, PHC’s & CHC’s </li></ul><ul><li>Investment in various Health programmes, such as leprosy, TB, HIV/Aids etc. </li></ul>
8. 8. Dividend Decision <ul><li>In simple terms, Dividend means return on investment. </li></ul><ul><li>Practically there is no return in public health </li></ul><ul><li>Logically-------------- </li></ul><ul><li>“ Every Investment bears a return.” </li></ul>
9. 9. Example <ul><li>In India we have Pulse polio programme </li></ul><ul><li>Target population is all children below 5 yrs </li></ul><ul><li>of age. </li></ul><ul><li>In this case the investment is identifiable: The </li></ul><ul><li>amount spent by the govt. to launch & sustain </li></ul><ul><li>this programme. </li></ul><ul><li>Identify the return? </li></ul>
10. 10. Tools of Financial Management <ul><li>Costing </li></ul><ul><li>Budgeting </li></ul><ul><li>Accounting </li></ul><ul><li>Auditing </li></ul>
11. 11. Cost <ul><li>Costs provide the basis for preparing Budgets. </li></ul><ul><li>Cost is intended as the value (expressed in monetary terms) of resources used to produce something. </li></ul>
12. 12. Cost Accounting <ul><li>Formal system of accounting for costs through which costs of products or services are ascertained and controlled. </li></ul><ul><li>NEED: </li></ul><ul><li>Ascertainment of cost </li></ul><ul><li>Cost monitoring and control </li></ul><ul><li>Decision making </li></ul>
13. 13. Cost Control <ul><li>Cost Containment - within the budget </li></ul><ul><li>Cost Reduction - reduce budgeted cost (eg. Non-utilization of certain facilities, idle capacity etc) </li></ul><ul><li>Cost Removal - cost not incurred but services availed </li></ul>
14. 14. Cost Containment <ul><li>Need Flexibility to built into the system </li></ul><ul><li>Consider time factor –inflation </li></ul><ul><li>Credit control </li></ul><ul><li>Control Salary/wages etc –over time salary, other fringe benefits </li></ul>
15. 15. <ul><li>Postponement of non-essential purchase </li></ul><ul><li>Economy in purchase/consumption </li></ul><ul><li>Rational use of electricity, gas, water etc </li></ul><ul><li>Pruning of miscellaneous areas-printing, stationery, telephone bills etc. </li></ul><ul><li>Outsourcing of services </li></ul>Cost Containment
16. 16. How to reduce costs? <ul><li>Substitution – eg. Generic vs branded drugs </li></ul><ul><li>Economies of scale – utilizing fixed assets fully </li></ul><ul><li>Cost sharing – eg. Supply costs of deptts. </li></ul><ul><li>Bulk purchasing – eg.drugs </li></ul><ul><li>Reducing idle capacity – examine utilization of staff </li></ul>
17. 17. The Budget <ul><li>The device that allocates the shortage of public money </li></ul><ul><li>There is never enough money to do all the things people want done. </li></ul>
18. 18. The Budget <ul><li>We use budgets to decide what is most important and who gets what proportion, or share, of public resources </li></ul>
19. 19. Therefore: <ul><li>A budget ( should ) = </li></ul><ul><li>a priority list of government actions and policies </li></ul>
20. 20. Budget <ul><li>It is a document that projects the costs, and in many cases the revenues, of defined activity, programme or project, or organisation </li></ul><ul><li>A good budget is a fundamental tool for financial management </li></ul><ul><li>It is a financial plan that quantifies the organisation’s programmatic goals and objectives by guiding the allocation of financial & human resources </li></ul>
21. 21. Good Budget ? <ul><li>Covers a defined set of activities (single/whole) </li></ul><ul><li>States the time period covered – fiscal year </li></ul><ul><li>It is realistic about expected revenues </li></ul><ul><li>It includes indirect costs –(eg. Fringe benefits, OH costs, general admn etc.) </li></ul><ul><li>It is based on collaboration between the programme & financial managers </li></ul>
22. 22. Performance Budgeting <ul><li>It is a presentation indicating the work done in the hospital for the particular year, the work proposed to be done in the ensuing year and the cost of carrying them out. </li></ul><ul><li>Management information system and cost accounting are two essential pillars of PB </li></ul>
23. 23. Zero Base Budgeting <ul><li>Introduced by GOI in 1986 </li></ul><ul><li>It is not a budgeting process but a management approach to the planning process </li></ul><ul><li>Under this approach, budget making for the ensuing year should be started from zero instead of treating the current year’s budget as a bench mark </li></ul>
24. 24. Zero Base Budgeting <ul><li>View all activities of the organisation afresh and to determine priorities with reference to analysed objective criteria. </li></ul><ul><li>For eg. While deciding budget for pediatric department, expenditure on counselling may be deleted with the reason that it is not worth spending. </li></ul>
25. 25. Budget <ul><li>It is a document that projects the costs, and in many cases the revenues, of defined activity, programme or project, or organisation </li></ul><ul><li>A good budget is a fundamental tool for financial management </li></ul><ul><li>It is a financial plan that quantifies the organisation’s programmatic goals and objectives by guiding the allocation of financial & human resources </li></ul>
26. 26. Some types of Budget <ul><li>Plan & Non-Plan Budget </li></ul><ul><li>Rolling & Fixed Plan Budget </li></ul><ul><li>Capital & Operating Budget </li></ul><ul><li>Departmental & Master Budget </li></ul>
27. 27. BUDGET <ul><li>The government budget primarily constitutes </li></ul><ul><li>Revenue budget - refers to expenditures and receipts of an annually recurrent nature; for example, staff-salaries of a hospital is revenue expenditure </li></ul><ul><li>Capital budget - refers to investment expenditure incurred with the object either of increasing concrete assets of a material and permanent character or of reducing recurring liabilities. </li></ul>
28. 28. Health Family Welfare General Administration Vertical Programs Public Health And Health Care Programs <ul><li>Vector Borne Diseases Control </li></ul><ul><li>Tuberculosis Control </li></ul><ul><li>HIV / AIDS Control </li></ul><ul><li>Blindness Control </li></ul><ul><li>Leprosy Control </li></ul><ul><li>Cancer Control </li></ul><ul><li>Mental Health Program </li></ul><ul><li>Prevention & Control of Communicable Diseases </li></ul><ul><li>Primary Health Care </li></ul><ul><li>Secondary Hospital Development Program </li></ul><ul><li>Bureau of Health Education and School Health </li></ul><ul><li>Direction and Administration </li></ul><ul><li>Drugs Logistics and Government Medical Stores </li></ul><ul><li>State Transport Organisation </li></ul><ul><li>Public Health Institute and Training </li></ul><ul><li>Reproductive Child Health Program </li></ul><ul><li>Immunisation Program </li></ul><ul><li>Urban Family Welfare Program </li></ul>Program Chart of Health and Family Welfare
29. 29. Responsibilities in Health by levels of Government AYUSH MEDICAL EDUCATION & RESEARCH FAMILY WELFARE HEALTH CENTRAL Govt. level STATE Govt. level LOCAL Govt. level (ULB/PRI) Communicable Diseases Secondary Healthcare Facilities Clinics & Dispensaries RCH-II Primary Healthcare Facilities Medical Education & Research Medical College Hospitals Secondary Healthcare Facilities Clinics & Dispensaries Medical Education & Research
30. 30. Structure of Health Budget PLAN NON PLAN CENTRALLY SPONSORED SCHEMES State Funds EXTERNALLY AIDED PROJECTS REVENUE EXPENDITURE CAPITAL EXPENDITURE LOAN ACCOUNT EXPENDITURE “ SOCIETY” ROUTE (NRHM & RCH-II Flexi-pools; NACP-III) 2210 2211 4210 4211 6210 6211 “ TREASURY” ROUTE
31. 31. All India: Health as proportion of total Budget
32. 32. Budgeting Process <ul><li>Budgeting is supposedly from below </li></ul><ul><ul><li>Block to District to State </li></ul></ul><ul><li>Exercise begins sometime around October -November </li></ul><ul><li>Draft discussed with Finance Dept (around December) </li></ul><ul><li>Finance Department reviews and indicates a ceiling </li></ul><ul><li>Draft is reworked to fit the ceiling </li></ul><ul><li>Back to Finance Dept (around February) </li></ul><ul><li>Finance consolidates demands of all Depts and State budget finalised </li></ul>
33. 33. Health Budget Document: A Glance <ul><li>Health budget is organised into numerous heads </li></ul><ul><li>Medical and Public Health </li></ul><ul><ul><li>Urban health </li></ul></ul><ul><ul><li>Rural Health </li></ul></ul><ul><ul><li>Medical Education & Research </li></ul></ul><ul><ul><li>Public Health </li></ul></ul><ul><li>Family Welfare </li></ul><ul><li>These consist of a large number of line items (3000 to 7000) </li></ul>
34. 34. Performance Budgeting <ul><li>It is a presentation indicating the work done in the hospital for the particular year, the work proposed to be done in the ensuing year and the cost of carrying them out. </li></ul><ul><li>Management information system and cost accounting are two essential pillars of PB </li></ul>
35. 35. Program Performance Budgeting vs Traditional Budgeting <ul><li>Traditional Budgeting </li></ul><ul><ul><li>Inputs </li></ul></ul><ul><ul><li>Line Items </li></ul></ul><ul><ul><li>Control </li></ul></ul><ul><ul><li>Incremental changes </li></ul></ul><ul><ul><li>at margin </li></ul></ul><ul><ul><li>Centralized budget execution </li></ul></ul><ul><li>Program Budgeting </li></ul><ul><li>Outcomes </li></ul><ul><ul><li>Programs </li></ul></ul><ul><ul><li>Performance </li></ul></ul><ul><ul><li>Resource Allocation </li></ul></ul><ul><ul><li>based on need </li></ul></ul><ul><ul><li>Decentralized budget </li></ul></ul><ul><ul><li>execution (in the long-run </li></ul></ul>
36. 36. Zero Base Budgeting <ul><li>Introduced by GOI in 1986 </li></ul><ul><li>It is not a budgeting process but a management approach to the planning process </li></ul><ul><li>Under this approach, budget making for the ensuing year should be started from zero instead of treating the current year’s budget as a bench mark </li></ul>
37. 37. Issues of Concern <ul><li>Budgeting in India is an annual exercise- plan expenditure unspent </li></ul><ul><li>Long term projects – generally delay occur in implementation leading to lapse of funds </li></ul><ul><li>March –rush expenditure </li></ul><ul><li>Lack of flexibility – rigid budget lines </li></ul><ul><li>Not need based </li></ul>
38. 38. Issues of Concern <ul><li>Lack of Vision, planning, research, evidence </li></ul><ul><li>Inability/ unwillingness to move away from “ Tradition, Rules, Regulations ” (at the cost of society, wasting scarce resources) </li></ul><ul><li>Lack of feedback, monitoring the system, disconnect/ disintegrated functions & systems </li></ul><ul><li>Lack of ownership, accountability, transparency </li></ul><ul><li>Lack of public participation </li></ul>
39. 39. Costing <ul><li>An effective tool for budget control </li></ul><ul><li>Cost Centres : represents allied group of activities or functions Eg. Laboratory services </li></ul><ul><li>Cost Units : represents measurable details of service rendered in the cost centres Eg. X-ray investigation </li></ul>
40. 40. The Model to Estimate Costs: Making a Cake Inputs <ul><li>Labor </li></ul><ul><li>Equipment </li></ul><ul><ul><li>Oven </li></ul></ul><ul><ul><li>Pans </li></ul></ul><ul><ul><li>bowls </li></ul></ul><ul><li>Materials </li></ul><ul><ul><li>Flour </li></ul></ul><ul><ul><li>Sugar </li></ul></ul><ul><ul><li>butter </li></ul></ul>Processes <ul><li>Assemble ingredients </li></ul><ul><li>Turn on oven </li></ul><ul><li>Mix the batter </li></ul><ul><li>Prepare the pans </li></ul><ul><li>Pour batter into pans </li></ul><ul><li>Bake for 25 minutes </li></ul><ul><li>Frost the cake </li></ul>Outputs Frosted Cake
41. 41. Moving From Inputs to Costs <ul><li>Identify the inputs </li></ul><ul><li>Measure them </li></ul><ul><li>Value them </li></ul><ul><li>Multiply amount of each input used by its unit cost </li></ul><ul><li>Sum up </li></ul>
42. 42. Measure the Inputs – Providing ANC <ul><li>Labor </li></ul><ul><ul><li>Nurse – how much time is spent providing ANC </li></ul></ul><ul><ul><li>Receptionist – how much time is spent supporting the nurse </li></ul></ul><ul><li>Supplies </li></ul><ul><ul><li>Vaccine used </li></ul></ul><ul><ul><li>Needles </li></ul></ul><ul><ul><li>Syringes </li></ul></ul><ul><ul><li>How much of the office supplies are used to provide ANC </li></ul></ul><ul><li>Equipment </li></ul><ul><ul><li>How much of the exam table is used to support ANC </li></ul></ul><ul><ul><li>How much of the office computer is used to support ANC provision </li></ul></ul>
43. 43. Classification of Costs <ul><li>Fixed vs. Variable </li></ul><ul><li>Direct vs. Indirect </li></ul><ul><li>Joint vs. Non-joint </li></ul>
44. 44. Fixed vs. Variable Costs <ul><li>Fixed: Costs which do not vary with the level of output </li></ul><ul><li>Variable : Costs which do vary with the level of output (e.g., supplies, nurse hours, etc.) </li></ul>
45. 45. Fixed or variable? <ul><li>Hospital building </li></ul><ul><li>Brochures given to clients </li></ul><ul><li>Salary given to nurses </li></ul><ul><li>X-ray machine </li></ul><ul><li>Surgeon: paid on a per-procedure basis </li></ul>
46. 46. Direct vs. I ndirect Costs <ul><li>Direct : Value of resources specifically attributed to the production of a service </li></ul><ul><li>Indirect : Value of resources used to support the production of a service </li></ul>
47. 47. Direct or Indirect? <ul><li>Salaries of clinical staff </li></ul><ul><li>Physicians salary </li></ul><ul><li>Electricity bills </li></ul><ul><li>Salaries of accountants </li></ul><ul><li>Hospital building </li></ul>
48. 48. Joint Costs <ul><li>D efinition: </li></ul><ul><li>Costs of resources used to produce more than one type of output (shared equipment, labor, etc.) </li></ul><ul><li>Usefulness of joint costs definition: </li></ul><ul><li>Identifies resources whose costs should be allocated to different outputs </li></ul>
49. 49. Allocation of Joint Costs of ANM 40% FP 30% ANC 20 % Curative % Annual salary Rs.1,10,000 10% MIS
50. 50. Cost-Benefit Analysis (CBA) <ul><li>A technique of economic evaluation which values both costs and benefits in monetary terms: compares them and assessing whether the health programme/s or project is worthwhile </li></ul>
51. 51. Cost-Benefit Analysis (CBA) <ul><li>Estimation and evaluation of net profit in terms of rupees associated with alternatives </li></ul><ul><li>It is used to justify particular health services programme is relatively more beneficial. </li></ul><ul><li>Benefits include social benefits (where applicable) </li></ul>
52. 52. Cost-Effectiveness Analysis (CEA) <ul><li>Comparison of costs and outcomes </li></ul><ul><li>Outcomes are measured in natural units </li></ul><ul><li>Clinical outcomes: </li></ul><ul><li>Diseases cured </li></ul><ul><li>Diseases prevented </li></ul><ul><li>Lives saved </li></ul><ul><li>Years of lives saved </li></ul>
53. 53. Accounting <ul><li>Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. </li></ul>
54. 54. Accounting Process <ul><li>Identify the transaction </li></ul><ul><li>Analyse the transaction </li></ul><ul><li>Journal entries </li></ul><ul><li>Post to ledger </li></ul><ul><li>Trial balance </li></ul><ul><li>Financial statements </li></ul>
55. 55. Financial Auditing <ul><li>It is required to verify that the procedures adopted are in confirmation with regulations, of utilizing funds. </li></ul><ul><li>Internal Vs External Audit </li></ul>