About the finance and its management

1. FISCAL
PLANNING

2. FINANCIAL MANAGEMENT
Financial management can be compared with
circulatory system within the body.
Financial administration means planning,
organizing, directing and controlling the financial
activities such as procurement and utilization of
funds of the enterprise. It means applying general
management principles to financial resources of
the enterprise.
It consists of all those operations, the objective of
which is to make funds, money available for the
organizational activities and to ensure the lawful
and efficient use of these funds in order to achieve
the organizational goals and objectives.

3. DEFINITIONS
 It is the process of putting the available funds to
best advantage from the long term point of view of
business objectives: Richard A Brealey
 Financial management is concerned with raising
the financial resources and their utilization
towards achieving the organizational goals: SN
Maheshwary
 Financial management is chiefly concerned with
maximizing the wealth of owners through wise and
rational investment of funds. It involves the
application of general management principles to a
particular financial operation. - Harward and
Upton

4. OBJECTIVES OF FINANCIAL
MANAGEMENT
 To ensure regular and adequate supply of funds to the
concern.
 To ensure adequate returns to the shareholders which
will depend upon the earning capacity, market price of
the share, expectations of the shareholders.
 To ensure optimum funds utilization. Once the funds
are procured, they should be utilized in maximum
possible way at least cost.
 To ensure safety on investment, i.e., funds should be
invested in safe ventures so that adequate rate of return
can be achieved.
 To plan a sound capital structure-There should be sound
and fair composition of capital so that a balance is
maintained between debt and equity capital.

5. FUNCTIONS OF FINANCIAL
MANAGEMENT
 Estimation of capital requirements: A finance manager has to
make estimation with regards to capital requirements of the
company. This will depend upon expected costs and profits and future
programmes and policies of a concern. Estimations have to be made in
an adequate manner which increases earning capacity of enterprise.
 Determination of capital composition: Once the estimation have
been made, the capital structure have to be decided. This involves
short- term and long- term debt equity analysis. This will depend
upon the proportion of equity capital a company is possessing and
additional funds which have to be raised from outside parties.
 Choice of sources of funds: For additional funds to be procured, a
company has many choices like-
 Issue of shares and debentures
 Loans to be taken from banks and financial institutions
 Public deposits to be drawn like in form of bonds.
 Choice of factor will depend on relative merits and demerits of each
source and period of financing.

6.  Investment of funds: The finance manager has to decide to
allocate funds into profitable ventures so that there is safety on
investment and regular returns is possible.
 Disposal of surplus: The net profits decision have to be made
by the finance manager. This can be done in two ways:
 Dividend declaration - It includes identifying the rate of dividends
and other benefits like bonus.
 Retained profits - The volume has to be decided which will depend
upon expantional, innovational, diversification plans of the company.
 Management of cash: Finance manager has to make decisions
with regards to cash management. Cash is required for many
purposes like payment of wages and salaries, payment of
electricity and water bills, payment to creditors, meeting current
liabilities, maintenance of enough stock, purchase of raw
materials, etc.
 Financial controls: The finance manager has not only to plan,
procure and utilize the funds but he also has to exercise control
over finances. This can be done through many techniques like
ratio analysis, financial forecasting, cost and profit control, etc.

7. SCOPE OF FINANCIAL
MANAGEMENT
According to Dr. S. C. Saxena, the scope of financial management
includes the following five As
1. Anticipation : Financial management estimates the financial needs of
the company. That is, it finds out how much finance is required by the
company.
2. Acquisition : It collects finance for the company from different sources.
3. Allocation : It uses this collected finance to purchase fixed and current
assets for the company.
4. Appropriation : It divides the companies profits among the
shareholders, debenture holders, etc. It keeps a part of the profits as
reserves.
5. Assessment : It also controls all the financial activities of the company.
Financial management is the most important functional area of
management. All other functional areas such as production
management, marketing management, personnel management, etc.
depends on Financial management. Efficient financial management is
required for survival, growth and success of the company or firm.

8. ELEMENTS OF FINANCIAL
MANAGEMENT
 Investment decisions- they includes investment in fixed
assets (called as capital budgeting). Investment in current
assets are also a part of investment decisions called as
working capital decisions.
 Financial decisions - They relate to the raising of finance
from various resources which will depend upon decision on
type of source, period of financing, cost of financing and the
returns thereby.
 Dividend decision - The finance manager has to take decision
with regards to the net profit distribution. Net profits are
generally divided into two:
 Dividend for shareholders- Dividend and the rate of it has to be
decided.
 Retained profits- Amount of retained profits has to be finalized
which will depend upon expansion and diversification plans of the
enterprise.

9. FINANCE
 Finance consists of providing and utilizing the
money, capital rights, credit and funds of any
kind which are employed in the operation of
organization.
 It is the branch of economics dealing with
resources allocations as well as resource
management, acquisition and investment. It
deals with matters related to money and the
markets.

10. NURSING FINANCE
 Nursing finance includes the techniques of
maximizing financial output and the
optimization of financial resources.
SCOPE
 It can help to direct and guide the nursing
administrators in formulation and
implementation of financial policies of an
organization efficiently and systematically.
 Efficient nursing services finance can generate
development, dynamism and modernization and
ultimately leading to quality patient care.

11. HEALTH CARE FINANING
 It is the mobilization of funds for the health are,
allocation of funds to the regions and population
groups and for specific type of health are and
mechanism for paying health care.
 Health care finance sources:
a. Public expenditure
b. Private expenditure
c. External sources

12. FINANCIAL PLANNING
 Financial planning is an important part of
financial management.
 It is the process of determining the objectives,
policies, procedures, programmes and budgets to
deal with financial activities of an organization.
 Financial planning is the process of estimating
the capital required and determining its
completion.
 It is the process of framing financial policies in
relation to procurement, investment and
administration of funds of an enterprise.

13. IMPORTANCE OF FINANCIAL
PLANNING
 Ensures provision of adequate funds to meet day
to day requirements of the organization as well
as its future expansion.
 Ensures timely availability of funds.
 Provides policies, procedures and plans.
 Helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is
maintained.
 Ensures that the suppliers of funds are easily
investing in organization which exercise financial
planning.

14. STEPS IN FISCAL PLANNING
1. Determination
Clearly lay down the financial objectives. This
should be based on overall organizational
objectives.
2. Estimate the capital requirements
Assessment is to be made on fixed capital and
working capital for various needs or activities to
be carried out in the organization.
3.Formulation of financial policies
It leads to formulation of financial policies
related to funds, procurement, cash control and
other financial activities.

15. FACTORS AFFECTING FINANCIAL
PLANNING
 Objectives: Financial plan should be made in
light of organizational objectives.
 Requirements of organization: The financial plan
should be based on the present and future
requirements of the organization.
 Economy: The capital structure should be such
that there should be a balance between the cost
of the funds and services to be determined.
 Flexibility: Financial planning should be such
that it ensures flexibility to utilize the funds into
more profitable manner.

16. RESPONSIBILITIES OF A FINANCIAL
MANAGER
 Business forecasting
 Determination of financial objectives, financial polices and operational
procedures
 Estimation of the capital requirements of the business
 Designing the capital structure
 Determination of the proper sources of finance
 Investment decision
 Ensuring supply of required funds
 Controlling the use of funds
 Profit planning
 Disposal of surplus or profit, or dividend decision
 Management of working capital
 Wealth maximization
 Legal responsibilities
 Designing suitable system of providing information
 Keeping track of stock exchange quotations
 Co-ordination of the activities of subordinates'

17. FEATURES OF A SOUND FINANCIAL
PLAN
 It should be simple to understand and operate.
 It should be feasible to allow deduction or
expansion of funds.
 It should ensure optimum utilization of funds.

18. FINANCIAL MANAGEMENT TRIAD
IN NURSING SERVICES
 The financial management triad comprises of
three components
 a. Planning: plans are to be prepared prior to
budgeting. These plans determine the distribution
of revenue. There should be long term and short
term plans. Each nursing unit should be
considered for preparing the financial plan.
 b. Budgeting: Nursing managers should be
involved in budgeting of the department.
Budgeting is the allocation of resources: human,
material and financial to best assure the
accomplishment of nursing organizational goals.

19.  Operating budget includes daily activities and
services including patient care revenues, labor
costs, outside purchase services, supplies etc…
 Capital budget is money earmarked for the
purchase of permanent equipment or major
renovation, construction projects etc….
c. Evaluation
The final component of financial management
triad is evaluation. This is critical in determining
financial success of current budget year, as well as
in identifying areas that need additional attention
in plans for the next fiscal year.

20. FINANCIAL TERMS
 Revenue:- it is defined as total income produced
by a given source.
 Expense:-these are those items or services
necessary for operation that cost the unit,
department or organization money( salaries,
fringe benefits, utilities, office supplies).
 Variance:-Actual amount –budgeted amount
 Contribution margin:-Revenue-expenses
 Fiscal year- this is the 12 month accounting
period.

21. BUDGET
A budget is a tool for planning, quantifying the
plans and controlling costs-Flinker
Budget is an instrument used as an aid in planning,
programming and control of business activity.
A budget is a financial plan. It is projection of what
will happen financially if certain strategies and
decisions are implemented.
It is detailed plan of operations for some specific
future period followed by a system of record which
will serve as a check upon the plan.
It generally represents expected revenue as
compared with anticipated expenses.

22. COMPONENTS OF A NURSING
BUDGET
 1. A Revenue Budget is summarizing the income
the management expects to generate during the
planning period.
 2. An Expense Budget is describing expected
activity in operational financial terms for a given
period of time.
 3. A Capital Budget outlines the programmed
acquisitions, disposals and improvements in the
institution's physical capacity.
 4. A Cash Budget consists of money received,
cash receipts and disbursement expected during
the planning period.

23. IMPORTANCE OF BUDGET
 The budget is an essential management tool.
 The budget tells you how much money you need
to carry out your activities.
 The budget forces are rigorous in thinking
through the implications of your activities.
 The budget enables to monitor income and
expenditure and identify any problems.
 The budget is a basis for financial accountability
and transparency.

24. PURPOSES OF BUDGET
 Budget as a tool of financial control: it is exercised at
various stages.
 Budget is an instrument of organization policy, fiscal
policy. It is device whereby plans and policies are put
into action.
 Budget is a tool of administration. When planning, co-
ordination, control, evaluation, reporting and review are
combined in a budgetary system it becomes effective tool
of administration management.
 Budget is also a tool of accountability.
 It has informative roles as it contains valuable
information for various activities.
 Budget is forecast of income and expenditure and
thereby profitability

25. CHARACTERISTICS OF BUDGET
 It is a plan or programme, framed on the basis of
past experience.
 Budget is a scheme for action.
 It should estimate revenues and expenditures as
accurately as possible.
 It is comprehensive plan of action.
 These are generally annual plan.

26. TYPES OF BUDGETS
1.Bases on fiscal/non fiscal budget
FINANCIAL BUDGET NONFINANCIAL BUDGET
Capital budget
Revenue budget
Operational expenditure budget
Zero based budget
Performance budget
Program budget
Direct labor budget
Material budget
Production budget
Advertising budget

27. 2.Fixed Vs Variable/flexible budget, open ended
budget
3.Historical Vs Forecast/statistical budget
4.On the basis of period of coverage
a. Annual budget
b. Long term budget
c. Current budget
d. Rolling budget
5. On the basis of financial position
a. Balance budget
b. Deficit budget
c. Surplus budget

28.  Capital expenditure budget-this type of budget includes
the purchase of land, buildings, a major equipment of
considerable expense for life long.
 Operating budget-it includes the cost of supplies, minor
equipments, repairs and overhead expenses.
 Fixed budget-this refers to those components of budgets
that will not vary regardless of changes in patient
census or no. of procedures.
 Manpower or Direct labor house- the wages and
salaries paid to regular institutional employees are
included under this type of budget.
 Zero budget budgets-it is one of the budgets that do not
utilize any historical data and determine activity level
or expenses anticipated.
 Cash budget-this is prepared by way projecting possible
cash receipts and payments over budget period.

29.  Variable or flexible budget-this refers to those
components of budget that should fluctuate based
on these changes in the no. of procedures or unit
of activity.
 Trended budget-this one is based on the previous
years expenditure pattern.
 Time, space, material and product budgets
 Program budget-this where costs are computed
for a total programme.

30. BUDGETING
 Budgeting can be defined as allocation of scarce
resources on the basis of forecast needs, for
proposed activities over a period of time.
 Budgeting is the formation of plans for a given
future period in numerical terms.
 PRINCIPLES OF BUDGETING
 Annularity
 Comprehensiveness
 Unity
 Exclusiveness
 Specificity
 Accountability

31. PURPOSE OF BUDGETING
 Main purpose: to ensure the most effective use of
scarce financial and non financial resources.
 Specific purpose
1. It provides detailed plan to reduce uncertainty
2. It controls expenses by efficient and economical
manner.
3. It coordinates effort among organizational
departments.
4. It aids planning and control
5. It serves as an instrument for economic and social
policies.
6. Provides a criterion for evaluating managerial
performance.

32. FEATURES OF BUDGETARY
PROCESS
 Incorporates a long term perspective
 Establishes linkage to broad goals
 Focuses budget decisions on results and
outcomes.
 Involves and promotes effective communication.

33. STEPS IN BUDGETARY PROCESS
 1.BUDGET ESTIMATE PREPARATION
Usually the finances and budget preparation is dealt by
account section of the institute/hospital. The record of
revenue/income and expenditure is usually centralized.
2.BUDGET APPROVAL
Extra mural approval system: the approving authority is
the same for all government funded hospitals i.e. through
joint secretary, health secretary and health minister. It is
then presented in parliament and final approval is signed by
prime minister who is the chairman of planning commission.
Intra mural approval system
The intra mural approval system has to go in two steps;
firstly by the head of hospital and then by the head of
institute.

34. NURSING BUDGET
 Nursing budget is a plan for allocation of
resources based on preconceived needs for a
proposed series of programs to deliver patient
care during one fiscal year.
 A nursing budget is a systematic plan that is an
informed best estimate by nurse administrators
of revenues and nursing expenses.
 Nursing budget projects how revenues will meet
expenses and it projects a return on equity that
is profit.

35. ADVANTAGES OF NURSING
BUDGETING
 It can be strong support for developing written
objectives of nursing divisions and for each of its units.
 It provides motivation for effective planning and
standard by which to evaluate the performance of
nurse managers.
 Managing the financial end of nursing through an
operational budget obviously can create a new sense of
involvement for nurses.
 Effective planning provides for contingencies by
indicating which progress or activities can be reduced
or eliminated if budget goals are not met.
 Nursing budget plan ensure that clients receive the
nursing services from satisfied nursing staff.

36. STEPS OF NURSING BUDGETING
1.Determine the productivity goals. The director of nursing service and the nurse
manager determine the unit’s productivity goal for the coming fiscal year.
2.Forecast the workload, the no. of patients expected on each nursing unit for the
coming fiscal year is calculated.
3.Budget patient care hours -the expected no. of hours devoted to patient care for
the forecasted patient days is calculated.
4. Budget patient care hours and staffing schedules. The budget patient care
hours are reflected in recommended staffing schedule by shift and by day of
the week.
5. Plan non productive hours and productive hours are budgeted for the coming
year.
6.To aid in planning process, a graph is used to show nurses and the level of
forecasted patient days and therefore the staff requirement are expected to
increase or decrease during the year, considering educational activities.
7. Estimate costs and supplies and services. The supplies and services to be
purchased for the year are budgeted.
8. Anticipate capital expenses. The expected capital investment for the coming
year is included in the budget.

37. ZERO BASED BUDGETING
 A method of budgeting in which all expenses
must be justified for each new period.
 Zero-based budgeting starts from a "zero base"
and every function within an organization is
analyzed for its needs and costs.
 Budgets are then built around what is needed for
the upcoming period, regardless of whether the
budget is higher or lower than the previous one.
 It is a technique of planning and decision making
which reverses the working process of traditional
budgeting.

38. STEPS OF ZERO BASED BUDGETING
 Identify org. program.
 Divide the program into packages.
 Each package should have its goals, activities
and needed resources.
 Calculate the cost for each package from the base
zero.
 The costs are calulated afresh for each budget
period

39. ADVANTAGES OF ZERO BASED
BUDGETING
 Find cost effective ways
 Efficient allocation of resources
 Staff motivation
 Eliminate Wasteful operation
 Identify opportunities
 Identify mission
 Increases Communication & coordination

40. DISADVANTAGES OF ZERO BASED
BUDGETING
 Difficult to define decision units
 Forced to justify every detail
 Necessary to train managers
 Compressing may remove critically important
details
 Honesty of the managers must be reliable &
uniform

41. PERFORMANCE BUDGETING
 Performance budgeting is a system of planning,
budgeting, and evaluation that emphasizes the
relationship between money budgeted and
results expected.
 It is a system of presentation of expenditure in
terms of functions, programmes, performance
units, reflecting primarily the output and its cost.
 It emphasizes outcomes and results instead of
activities or outputs. Thus manager would
budget as needed to achieve specific outcomes
and would evaluate budgetary success
accordingly.

42. CHARACTERISTICS
 Agency identification of mission, goals, and
objectives;
 Linkage of strategic planning information with
the budget;
 Development and integration of performance
measures into the budget
 Disaggregation of expenditures into very broad
areas (such as personnel, operating expenses,
and capital outlays) rather than more specific
line-items.

43. STEPS OF PERFORMANCE
BUDGETING
 Define the objectives or areas of accomplishment for the unit
or department. These are called performance areas. Some
examples of performance areas are quality of care, nursing
satisfaction, patient satisfaction, productivity and innovation.
 Identify the operating budget costs for the cost center being
evaluated. In a nursing unit these costs include items such as
salary for the unit nurse manager, salaries for clinical staff,
education costs, and supplies.
 Determine what percentage of available resources should be
used for each performance area.
 Assign the budgeted and costs for the centre to the individual
performance areas on the basis of those percentages.
 Choose measures of performance for each performance area
and to determine the cost per unit of workload based on those
measures.

44. OBJECTIVES
Performance budgeting seeks to:
 i) correlate the physical and financial aspects of
programmes and activities;
 ii) improve budget formulation, review and decision-
making at all levels of management in the
organization.
 iii) facilitate better appreciation and review by the
legislature;
 iv) make possible more effective performance audit;
 v) measure progress towards long-term objectives as
vissionized in the plan; and
 vi) bring annual budgets and developmental plans
together through a common language.

45. COMPONENTS
The performance budgets have certain vital
ingredients that need to be constantly kept in
view:
 i) a programme and activity classification that
represents the range of work of each organization;
 ii) a framework of specified objectives for each
programme;
 iii) a stipulation of the targets of work or
achievement; and
 iv) suitable workload factors, productivity and
performance ratios that justify financial
requirements of each programme.

46. PURPOSE
 To review at every level of organization, so as to
measure progress towards the short term and
long term objectives.
 To interrelate physical and financial aspects of
every programme or activity.
 To facilitate more effective performance audit.

47. BENEFITS OF PERFORMANCE
BUDGETING
 It correlates the physical and financial aspects of
every programme or activity.
 It improves budget formulation, review and
decision making at all the levels of department or
undertaking.
 It facilitates better appreciation and review of
performance.

48. MID TERM APPRAISAL
 The mid term appraisal reviews the experience in
the first three years of the five year plan and seeks
to identify areas where corrective steps may be
needed.
 It also provides an opportunity to take stock of the
economy and to introduce policy corrections and
new initiatives in critical areas in the context of
the new priorities, the progress made in utilizing
productive capacities and the success achieved on
the investment front.
 MTA presents a candid assessment of the
resources position facing both the centre and the
states and the implications.

49. PROGRAM PLANNING BUDGETING
SYSTEM
 Program planning budgeting system is a system
for planning and control. It is launched in 1965.
 It is process under which priorities among kinds
of services may provide are weighed; objectives
are stated in operational term, alternative means
to accomplish the given objectives are analyzed.
 It is a systematic method of allocating the
resources of an organization in ways that will
most effectively help the organization to meet its
goals and objectives. This is known as program
budgeting.

50. STEPS OF PPBS
 Develop alternate implementation program to
meet the objective.
 Estimate the resource and possible benefits of
each program.
 Selecting among alternatives.
 Design a managerial technique to merge the
planning process with the allocation of funds.
 A comprehensive planning process that includes
program budgeting as its major component.

51. AUDIT
 Audit is an assessment of the management
practices, financials and operations of an operation.
 The general definition of an audit is an evaluation
of a person, organization, system, process,
enterprise, project or product. The term most
commonly refers to audit in accounting, but similar
concepts also exists in project management, quality
management etc.
 Auditing is the independent examination of
information of any entity, whether profit oriented
or not, and irrespective of its size or legal form,
when such an examination is conducted with a view
to expressing an opinion thereon.

52. PURPOSES OF AUDIT
 It makes sure that all the financial statement of
concern are presented fairly.
 Audit gives a fair and true picture in accordance
with financial reporting framework.
 It enhances the degree of confidence of intended
users in financial assessment.

53. TYPES OF AUDIT
 1.EXTERNAL AUDIT
 An external audit is a review of the financial
statements or reports of an entity, usually a
government or business.
 This is an independent review of financial
documents provided to the auditor.
 The audit is conducted by regulatory agency
hired by the entity and the auditors .

54. IMPORTANCE OF EXTERNAL AUDIT
 To verify that the financial statements of an
entity are correctly presented.
 It represents an unbiased procedure as conducted
by third party.
 It has an independent financial review that
ensure the taxpayers that budgeted funds are
being appropriately spent and revenues are
appropriately projected in public sectors.
 External audit provides an independent
assessment of organizational financial holding.

55. PURPOSES OF EXTERNAL AUDIT
 The main purpose of external audit is to ensure
that internal control, processes, guidelines are
adequate and in line with the government
requirements.
 To provide an independent and unbiased
assessment of an organization’s internal
governance and financial terms.
 To verify internal procedures.
 To evaluate adherence of the organization to the
standards and principles.
 To evaluate the adequacy and effectiveness of
existing internal control.

56. TYPES OF EXTERNAL AUDIT
 Financial audit
 Operations audit
 Compliance audit

57. a. Financial audit
Financial audit or audit of financial statements is
a statutory requirement of each and every
registered company.
Financial statements’ audit is carried out by
professionally qualified personnel’s known as
auditors.
The primary objective of carrying out financial
audit is to obtain an unbiased and independent
opinion from auditors that the financial
statements are giving a true and fair view, and
they are out of material misstatements.

58. b. Operations audit
Operational audit is a structured review of the
systems, internal controls, and procedures of an
organization in order to evaluate whether they are
being constructed efficiently and effectively and to
make suggestions to improve them, if necessary.
The operational audit is designed to assess the
control level exercised by management, and it
mainly focus on effectiveness and efficiency of
operations, reliability and integrity of financial and
operational information, safeguarding of assets, and
compliance with laws, rules and regulations.

59.  c. Compliance audit
Audit undertaken to confirm whether a firm is
following the terms of an agreement, or the rules
and regulations applicable to an activity or practice
prescribed by an external agency or authority.
Compliance audits assure the government that a
business is following the rules and regulations of a
specific agreement.
These are done not just for checking upon the
organization but also for further improvement of the
organization.
It helps an organization to improve its revenue,
customer satisfaction and corporate culture.

60. INTERNAL AUDIT
 Internal audit has been recognized as an aid to
management for monitoring the financial and
effectiveness of various departments in the
execution of various programs, schemes and
activities.
 It is an independent management function,
which involves a continuous and critical
appraisal of the functioning of an organization
with a view to strengthen the overall governance
mechanism of the organization or entity,
including the entity’s risk management and
internal control system.

61. ROLE OF INTERNAL AUDIT
 .REGULATORY AND COMPLIANCE ROLES
Quality of public expenditure
Proper implementation of rules and regulations.
Maintenance of proper records
Accuracy in expenditure reporting
 . EFFICIENCY CUM PERFORMANCE ROLES
Efficiency and economy in public expenditure
Effectiveness of expenditure
Proper realization, accounting and reporting of
revenue reciepts.

62. IMPORTANCE OF INTERNAL AUDIT
 Helps in understanding and assessing the risks and
evaluate the adequacies of the prevalent internal
controls.
 Identifying areas of systems improvement and
strengthening controls.
 Ensures optimum utilization of the resources, skills and
time of the entity, for example, human resources,
physical resources etc…
 Ensuring compliance with internal and external
guidelines and policies of the entity as well as the
applicable statutory and regulatory requirements.
 Safeguarding the assets of the entity.
 Reviewing and ensuring adequacy, relevance, reliability
and timeliness of management information system.

63. AN INTERNAL AUDIT PLAN
 An internal audit plan is a document defining the
scope, coverage and resources, including time,
required for an internal audit over a defined
period.
 It also includes development of audit
programme, nature and extent of audit
procedure. It should be comprehensive.

64. CHARACTERISTICS OF AN
INTERNAL AUDITOR
The internal auditor should be:
 Be sincere, honest, and fair in his/her approach to professional
work.
 Maintain the confidentiality of the information acquired in the
courses of auditing unless there is legal or professional
responsibility to do so.
 Exercise due professional care, competence and diligence while
performing audit.
 Carefully direct, supervise and review the work delegated to
assistants.
 Plan the work well in advance and develop audit plan.
 Obtain sufficient appropriate evidences with his/her professional
judgment in order to draw reasonable conclusions.
 Undertake work involving identification of risks as well as
recommend design of control in existing controls.
 Submit an audit report and suggest remedial actions.

65. COSTS
Costs are the values of all the resources, tangible
or intangible, used to produce goods.
The cost of intervention is a measure of the value
of all resources used in the intervention. The cost
of intervention is an important part of the
decision to use one intervention over another.
Cost is the amount of resources used for
something which must be measured in terms of
money.
Cost of service can be calculated by ascertaining
the resources used for the services.

66. ELEMENTS OF COST
 1.MATERIAL COST
The cost of material is divided into direct material
cost and indirect cost.
The direct material cost is the cost if the material
in question is used directly in the manufacture of
product and becomes a part of the product.
Whereas the indirect material cost is that cost
which is indirectly required for the material but
is essential for the manufacture of the same, e.g.
supplies of lubricating oil, fuel etc…

67. 2.LABOUR COST
The cost of labor is also divided into
direct labour cost and indirect labor cost.
The direct labor cost is the cost which is
applied directly to manufacture of a
product.
The indirect labour cost is one which has
a more general and less direct
application is considered cost e.g.
salaries of maintenance workers.

68. 3.EXPENSES OR OVERHEAD COST
These include department or office rent, local
rates and taxes, insurance, depreciation etc. the
following are the categories of overhead cost
Department cost: these include all expenses
chargeable to department.
Administrative expenses: these include the office
rent, general office salaries, professional fees, etc.
Selling expenses: these are related to distribution
of the product.

69. COST CLASSIFICATIONS
 According to elements of costing the three elements of
costing are material, labor and expenses.
 According to nature of cost
a. Direct costs- it is the cost incurred exclusively on the
production of commodity, on execution of a job work, or
performing a job. Direct costs are the costs which are
identifiable with the product/service unit. It includes
expenses incurred on material, labour and stores on
manufacture of product.
b. Indirect costs-these are costs incurred on carrying on
the business on a whole and are to be allocated,
apportioned and then absorb in the production, service
units. These include departmental costs like rent,
electricity, fuel, depreciation etc…

70.  According to cost behavior
 Costs can be classified according to the behavior as
fixed costs, variable costs, semi variable or standard
costs
 A. fixed costs-a fixed cost remains unchanged in total
cost as the level of activity varies or changes in service.
 B. Variable cost-Variable costs are costs that change in
proportion to the good or service that a business
produces.
 C. Semi variable costs- Certain costs are partly fixed
and partly variable, e.g. maintenance costs,
supervisory costs, etc…
 D. Standard costs-the standard cost of production/unit
is the estimated cost. It is predetermined cost. In order
to estimate the cost of production, standards have to
fix in respect of each elements of costs.

71.  Classification according to functions
 A. Administrative costs -costs incurred for
administration is known as administrative costs.
 B. Selling and distribution costs-all costs
incurred for procuring an order are called as
selling costs while all costs incurred for
execution of order are distribution costs, e.g
market research expenses, advertising etc.. Are
selling costs and transportation expenses
incurred, warehouse rent etc are examples of
distribution costs.
 C. Research and developmental costs-
Expenditure incurred for this function are called
research and development costs.

72. According to time
a. Historical costs
These are the cost which are incurred in the past
or after the period is over. It has limited
importance, skill they can be used for estimating
the trends of the future. They can be effectively
used for predicting the future costs.
b. Predetermined cost
These costs are computed in advance on the basis
of a specification of all the factors affecting cost
and cost data. These may be either standard or
estimated.

73.  According to management decision point of view
a. Average cost -average cost is calculated by dividing the total
cost of production by no. of units.
b. Marginal cost-it is cost of marginal units produced over a lot
of production. It is the change in the aggregate costs due to
change in the volume of output by one unit.
c. Differential costs-it is also known as incremental cost. This
cost is the difference in total cost that will arise from the
selection of one alternative to the other.
d. Opportunity costs-it is the value of benefit sacrificed in favor
of an alternative course of action. Opportunity costs of goods
or services is measured in terms of revenue which could have
been earned by employing that goods or services in some
other alternative uses.
e. Relevant costs-the relevant costs is a cost which is relevant in
various decisions of management, whatever costs are relevant
is to be taken into consideration.
f. Replacement costs -it is the cost at which existing items or
materials or fixed assets be replaced.

74.  Abnormal costs-it is an unusual or a typical cost
whose occurrence is usually not regular and is
unexpected. Abnormal cost arises due to idle time,
may be due to some unexpected heavy breakdown of
machinery.
 Controllable costs-controllable costs are those which
can be controlled or influenced by conscious
management action.
 Shutdown cost-these costs are the costs which are
incurred if the operations are shut down and they
will disappear if the operations are continued.
 Capacity costs-these costs are normally fixed costs.
These costs are in the nature of long-term costs and
are incurred as a result of planning decisions.
 Urgent costs-these costs are those which must be
incurred in order to continue operations.

75. TYPES OF COSTS IN HEALTHCARE
 Types of cost used in health care are direct, indirect and intangible costs
 DIRECT COSTS
 It is defined as the value of all resources expended on design and
implementation of health intervention, lab tests, and facilities. By
definition ,direct costs can be either medical or nonmedical.
a. Direct health costs - the costs relating into providing treatment are
categorized direct medical costs.eg cost of vaccines, nurses salaries etc…
b. b. direct non health care-it is incurred in connection with health care
services for care provided by family members, transportation to and from
site to care.
INDIRECT COSTS
Indirect costs are the income forgone because of changes in productivity as a
result of health intervention or illness for eg..time lost from work or
decreased productivity because of health problems, the costs of lost work due
to absenteeism.
 INTANGIABLE COSTS
These are the nonmaterial costs. Intangible costs impose a major burden
on a patient. [losses in productivity, customer goodwil or drops in employee
morale]

76. COST ACCOUNTING
Cost accounting is the process of determining and
accumulating the cost of product or activity.
Cost accounting is accounting for cost aimed at
providing cost data, statement and reports for
the purpose of managerial decision making.
Cost accounting primarily deals with collection,
analysis of relevance of cost data for
interpretation and presentation for various
problems of management, cost accounting
accounts for the cost of products, services or an
operation.

77. OBJECTIVES OF COST ACCOUNTING
 To control cost by using various techniques such as budgetary
control, standard cost and inventory control.
 To provide information for decision making and planning to
formulate operative procedures.
 To help in directing and controlling operations.
 To ascertain costing profit.
 To motivate to achieve organization’s goals.
 To measure the performance of managers and sub units within
the organization.
 To provide information regarding the cost to make and sell
services.
 To provide immediate information regarding stock of raw
material, semi finished and finished goods.
 To facilitate preparation of financial and other statements.
 To help in estimation of costs for the future.

78. SCOPE OF COST ACCOUNTING.
 Cost book keeping
It involves maintaining complete record of all costs
incurred from their incurrence to their charge to
departments, products and services.
 Cost system
Proper accounting for costs requires systems and
procedures.
 Cost Ascertainment
Cost ascertainment forms the basis of managerial
decision making for planning and control.

79.  Cost Analysis
It involves the process of finding out the causal factors of actual
costs varying from the budgeted costs and fixation of
responsibility for cost increases.
 Cost Comparisons
Cost accounting also includes comparisons between cost from
alternative courses of action over a period of time.
 Cost Control
Cost accounting is the utilization of cost information for
exercising control. It involves detailed examination of each cost in
the light of benefit derived from the incurrence of the cost.
 Cost Reports.
The ultimate function of cost accounting is the presentation of
reports. These reports are primarily for use by the management
at different levels. Cost reports from the basis for planning and
control, performance appraisal and managerial decisions.

80. IMPORTANCE OF COST
ACCOUNTING.
1. To Management
o It helps in ascertainment of cost of process,product,activity
by using different techniques such as job costing and
process costing.
o Aids in price fixation by using demand and supply,
activities of competitors. Market condition to a great extent,
also determine the price of the product and cost to the
producer does play an important role. The producer can
take necessary helps from costing records.
o Helps in cost reduction by applying cost reduction
programme and improved methods are tried to reduce costs.
o Elimination of wastage by checking the forms of waste, such
as time and expenses etc.
o .

81. o Helps in identifying unprofitable activities so
that the necessary corrective action may be
taken.
o Helps in checking the accuracy of financial
account.
o Helps in fixing selling prices.
o Helps inventory control.
o Helps in estimate
2.To employees
 Employees have an interest in the firm in
which they are employed. An efficient costing
system benefits employees through incentives
plan in their enterprise.

82. LIMITATIONS OF COST
ACCOUNTING.
 It is expensive because analysis, allocation and
absorption of overheads require considerable
amount of additional work.
 The results shown by cost accountant differ from
those shown financial accountant.
 It is unnecessary because it involves duplication
of work.
 Costing system itself does not control costs. If
the management is alert and efficient, it can
control cost without the help of the cost
accounting