Finance Management (1)

7/30/2019 Finance Management (1)

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Cost Accounting


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Terms in Cost Accounting

Cost : Cost is a measurement, inmonetary terms, of the amount of

resources used for the purpose ofproduction of goods or renderingservices.

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Cost Centre : Any unit of CostAccounting selected with a view to

accumulating all cost under that unit.The unit may be a product, a service,

division, department, section, a group

of plant and machinery , a group ofemployees or a combination of several

units. This may also be a budget

centre 3


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Advantages of Cost Accounting

Reveals un-profitable activites,lossesor inefficiencies

Finding the causes for Decrease orIncrease in Profit or Loss

Furnishes data and Information to

management

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Classification of cost is thearrangement of items of costs in

logical groups having regard to their nature

(subjective classification) or purpose

(objective classification).

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Basis of classificationi) Nature of expense -Material Labour Expensesii) Relation to object traceability -Direct Indirect

iii)Functions / activities Production, Administration ,Selling

Distribution ,Research &Development

iv) Behavior -fixed, semi-variable or variable

v) Management decision making -Marginal Differential

Opportunity Cost Replacement Cost Relevant Sunk Cost Imputed

Cost Normal Cost Abnormal Cost Avoidable Cost Un-avoidable

Cost

vi) Production Process Batch Process Operation Operating

Contract Joint

vii) Time period-Historical Pre-determined Standard Estimated


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Basis of classificationi) Nature of expense -Material Labour Expenses

ii) Relation to object traceability -Direct Indirect

iii)Functions / activities Production, Administration ,Selling

Distribution ,Research &Development

iv) Behavior -fixed, semi-variable or variable

v) Management decision making -Marginal Differential

Opportunity Cost Replacement Cost Relevant Sunk Cost

Imputed Cost Normal Cost Abnormal Cost Avoidable Cost Un-avoidable Cost

vi) Production Process Batch Process Operation Operating

Contract Joint

vii) Time period-Historical Pre-determined Standard Estimated


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Sunk Cost A cost that has already been incurred and thus

cannot be recovered.

A sunk cost differs from other, future costs that a

business may face, such as inventory costs or R&Dexpenses, because it has already happened. Sunk

costs are independent of any event that may occur

in the future.


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Differential cost

is the difference between the cost of twoalternative decisions, or of a change in output

levels. The concept is used to reach decisions

about which alternatives to pursue, and which to

drop. The concept can be particularly useful

in step costing situations, where producing one

additional unit of output may require a

substantial additional cost.
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Financial management definition

It is the art and science of managing money

The most essential requirement of any organized

business or activity

The process of procuring and judicious use of

resources with a view to maximize the value of the

firm

Interdependence with other areas of management


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Basic finance literacy1. Income and expenditure statement

2. Cash flow: outgoing, incoming

3. Balance sheet: final accounting item (what

the practice is worth)

4. Budgeting: a process of estimation of

income and expenditure

5. Assets

6. Liabilities

7. Capital


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Balance Sheet

A statement of assets, liabilities and capital on agiven date

Assets:

Fixed: land, building, equipments etc Current: Cash in hand or in bank, stocks,

debtors

Liabilities Long term: Loans > 1 yr

Current/ short term: overdraft, taxes

Capital= Assets -Liabilities


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Some core issues

Budget

Accounting

Cost Accounting

Break even point

Cost benefit analysis

Cost reductions and containment

Day to day activities


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Budget

An important instrument of the financial management

used as aid in planning, programming and control

A budget may be defined as a financial and

quantitative statement, prepared and approved prior

to defined period of time, of the policy to be pursued

during that period for the purpose of achieving the

given objective.


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Budget: advantages

It is a tool for -

a) Quantitative expression of the planning

b) Evaluation of financial performance inaccordance with plans

c) Controlling costs

d) Optimizing the use of resources

e) Directing the total efforts in to the most

profitable channels


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Planning & preparing budget Well in advance

An opportunity to plan expansion or

improving services , hence involve staff and

all departments

Plans must be realistic


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Types of budget

Importance :Understanding of various types of

budget can indirectly help us understand various

methods of finance management

1. Project budget : probable expenditure and likely

revenue for a specific project

2. Departmental budget


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Types of budget3. Operating revenue budget- related to volume of

work anticipated

4. Operating expenditure budget: recurringexpenditures for operation and maintenance of

services e.g. salaries and wages, supplies, supportutilities, maintenance

5. Capital budget ( non recurrent ): meant forgrowth ( new facilities), replacement of obsolete.

Needs are many prioritize6. Cash budget : provision for anticipated cash

expenditures , for planning the cash flow e.g.salaries, bills etc.


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Accounting

An art of recording , classifying and summarizing

data in a significant manner and interpreting theresults

Data may be in form of money transactions and

events which are, in part at least , of a financial

character


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Types of accounting1. Financial accounting: documentation of facts,

daily transactions

2. Cost accounting : expenditure for a particular

service

3. Management accounting : Analysis and

interpretation of financial information for

management purpose


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Nomenclature

a) Costing: to find out money spent on a service

b) Cost center: an allied group of activities in a hospital

eg laboratory, immunization, laundry service

c) Cost object: anything for which separate

measurement of cost is desired e.g. rooms, OT, ICU,

equipment

d) Cost unit: a measurable detail of service rendered

e.g. linen, laboratory investigation


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Categories of expendituresImportant in understanding dynamics of costing1. Capital Vs Recurring

2. Fixed Vs Variable

Fixed : Remains unchanged despite changes in related

level or volume of activity e.g. salary of permanent

staff

Variable volume dependent, varies in proportion to

changes in level of activity e.g. medicines,

consumables, power cost


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3.Direct vs indirect

expenditures Direct : Clearly linked to a service

Indirect: can not be clearly linked to a

particular cost object e.g.

administration cost,security cost


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Objectives & advantagesof costing

1. To get clear picture of financial situation

2. Identifying profitable and non profitable segments

and taking action accordingly

3. To decide pricing of services and discounts

4. To decide for out sourcing of services


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Advantages of costing5. Helps in entering into agreements with

TPA, corporate clients etc

6. Helps in identifying wastages

7. Helps in budgeting, planning


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Effective cost accounting1. Proper records

2. Proper segmentation of costs

3. Sound accounting practices,regularity

4. Record of utilization of equipments

5. Record and analysis of man power

utilization


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Difficulties in cost

accounting1. Many inputs have to be considered e.g. labor,

material, depreciation,

2. Every transaction has to carry a price tag

3. Variation in quality of service e.g. consultant to

consultant, patient to patient


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Break - even analysis Volume of activity at which total income justequals total variable and fixed costs

Lower break even point is more desirable e.g. bed

occupancy 60% Vs 80%

Advantages: Equipment selection and purchase

decision, formulating price policy


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Cost - benefit analysis An economic technique and formalized way

of comparing the cost and benefit of

undertaking an activity / project


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Expenditure - containmentand cost - cutting

Sound economic sense

It does not mean compromising quality

1. Promote awareness amongst staff

2. Practice cost monitoring: analyze actual expenditure

against budget and standards , find reasons for

variations, work on them

3. Cost management: establish systems with

responsibility and accountability


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4.Strategies for

expenditure controla) Decrease the cost of inputs relative to outputs:

materials, man power

b) Increase output relative to input: scheduling of

procedures, automation , remove bottle - neck in

the flow of services


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5.Cost saving areas

a) Streamlining of services e.g. laboratory, OT, indoorb) Purchases : planning, budgeting, bargaining, group

purchasing

c) Preventive maintenance AMCs, back upsd) Planning stage: quality manpower and machines,

planned recruitment, up gradation

e) Good accounting practices: automation, internal auditf) Energy audit


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Investments

We work hard to make money, but learn to

make your money work for you

Daily wage earners

Save, invest, build wealth, spend, give it away

Invest some percentage in improving services,

facilities

Stagnation without growth


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Personal investments Required for future expansion and growth

Commitment to the financial needs of the

family

Retirement planning

Building wealth.


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Various investment avenues1. Real Estate

2. Gold and Jewellery3. Government

Securities

4. Company Deposits

5. Mutual Funds

6. Equity

7. ULIP

8. Bank & company

FDs


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Some tips on day to day activities1.Accounting

a) Financial memory of practice

b) Matter of self discipline

c) Meticulous record of financial transactions

- legal requirement e.g. Form 3c

d) Employ accountant - good documentation

and reports generation

2. Computerization

3. Periodic meetings with CA


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4. Handling cash

Staff handles lot of cash

Doctors are too busy to supervise

Easy temptation

Introduce checks and balances - ensure strict cash

control Cash collection at counter (many advantages )

Minimize temptation for staff


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Tips

5. Deposit cash in bank daily or twice weekly

6. Have 2 distinct streams of cash flow

Cash inflow deposit daily

Cash outflow by withdrawal

7. Make schedule for making payments

8. Documentation support for all payments

9. Filing system: cash memos, paid bills, pending bills

10. Get personally involved for big transactions


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Tips

11. Reconcile bank statements

12. Do not allow anyone to take records home

13. To your staff, demonstrate your awareness

about what is going on and that you are careful

about money


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14.Handling search and seizurea) Keep your cool

b) Call your best friends as witnesses

c) Know your rights

d) Prevention is better than cure


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h

Thanks

Finance Management (1)

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