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Cost control and accounting

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Presentation on theme: "Cost control and accounting"— Presentation transcript:

1 Cost control and accounting
The role of cost control models and environmental accounting in healthcare waste management

2 Contains of course Cost and cost control FCA - Full Cost Accounting Environmental Accounting (EA) EMA – Environmental Managerial Accounting

3 The costs of healthcare waste
“Typical” conventional costs for healthcare waste: Disposal costs Treatment costs Waste collection items Waste segregation equipment Cleaning up spill kits PPE – Personal Protection Equipment Etc.

4 The “hidden” costs The real cost of waste can be like an iceberg with only a small part to see. It can be hidden: Image of the hospital (Quality) Lost of material and energy Liability of the hospitals Lost of labor time Regulatory compliance Etc.

5 Potentially hidden costs
Cost to be considered ! Conventional Costs Potentially hidden costs Regulatory Upfront Back-End Voluntary Contingent Costs Image and Relationship costs

6 Examples of hidden and less tangible costs:
Potentially hidden costs: Site preparation, permitting, installation for on-site treatment Closure of the treatment plant, disposal of inventory Training, monitoring, recordkeeping Less tangible costs: Superfund, personal injury, property damage (Liability) Employee safety and health compensation Future regulatory compliance cost Service quality Hospital image

7 Hidden “Overhead” environmental costs
Environmental costs in the healthcare sector are mostly hidden in the general overhead cost of a hospital: Health Service producing Cost Statement Variable Costs Materials Intermediates Additives Utilities Direct Labour Packaging Wastewater Treatment $2.27/lb. $0.87/lb. $0.41/lb. $0.96/lb. $11.32/lb. $10.31/lb. $9.14/lb. $0.04/kW-h $0.07/kW-h $27.40/hr $31.43/hr. $0.60/pkg. $0.57/pkg $0.01/gal. legal expenses environmentally driven R&D permitting time and fees environmental training Fixed costs Supervisor Fixed labour Depreciation Divisional overhead General services & administration Fixed Costs Supervisor Fixed Labour Depreciation Divisional Overhead General Services & Administration $4,600 $57,800 $1,227 $13,662 $1,294 Total Variable Cost Total Fixed Cost Total Service Cost Total Cost

8 The problem of fixed and variable costs
Fixed Costs are costs that do not vary with the service output, level or other factors e.g., waste equipment depreciation, labour Variable Costs are costs that do (or can) vary with the service output, level other factors e.g., disposable materials use (bags?), energy use A cost considered “fixed” at one hospital may be considered “variable” at another hospital Task: to correctly distinguish between fixed and variable costs when identifying and estimating environmental costs The goal of clear cost structure is to reduce variable costs If enviro. efforts will reduce a cost — then it is variable!

9 The problem of direct and indirect costs
Direct costs are costs that can be easily traced to a service e.g., direct material cost, direct labour cost Indirect costs are costs that cannot be traced easily to service e.g., energy use, insurance, maintenance, waste treatment A cost considered “direct” at one hospital may be considered “indirect” at another hospital In general, direct costs within an hospital are assigned directly to the process or service responsible for generating the cost Indirect costs are assigned to the institution, department, or ward overhead accounts It can be difficult to find costs “hidden” in overhead accounts

10 Identifying and estimation of costs
LESS HIDDEN MORE In general, as the list is followed, costs are more likely to be hidden or difficult to quantify. (but every case is different!) Equipment purchase, direct materials, energy, labour Waste disposal Recycle/rework, treatment, waste handling Regulatory compliance, other indirect costs Less tangible costs

11 The target of a clear cost structure
Clearing of decision making factors: To identify where, how and when to improve – means where to invest time and money! Cost focus Technical Project selection Regulatory Financial Organizational

12 FCA – Full Cost Accounting
FCA – what does it mean? It is an accounting practice that can help decision makers to identify and manage the cost of waste It helps to understand direct and indirect cost of waste service as well as upfront and backend cost To identify, analyze and report all monetary costs of resources associated with waste management It goes beyond the limits of cash flow accounting but does not negate cash flow principles

13 FCA – Full Cost Accounting
FCA – what are the benefits? Identifying the actual cost of waste services Enables the decision makers to learn the full costs of waste services, provides an systematic approach to isolate waste service costs to find out what drives these costs Foster more cost-efficient waste service Allows to consider the balance between the cost of a service and his utility, to evaluate whether a alternative method could provide a service for less money or greater value Improve of negotiation power For hospitals, seeking to privatizes the waste service, they are in a much stronger bargaining position if they understand the costs involved in providing the service

14 FCA – Full Cost Accounting
FCA – how does it work? Develop descriptive information about the waste service Including history, scope and future plans – how much waste is managed, who moves it, how often and by with means, where does it go – determining all activities and paths to identify costs Taking an inventory Finding out all assets that support the waste management Review of the organizational structure To identify internal and external organization which provide services and to find out there costs Review financial records and reports Purchases related to waste management, etc.

15 FCA – Full Cost Accounting
The five major FCA principles: Accounting for costs rather than outlays – costs over the live cycle Accounting for hidden cost – reflecting of costs and services Accounting for overhead and indirect cost to individual services Accounting for past and future costs Accounting for costs according to path or activities

16 FCA – Full Cost Accounting
FCA – What are the barriers? Lack of standardized methodology Difficult transition from cash flow accounting to FCA Allocation of waste management cost To find out which overhead costs belong to the waste service Accounting system changes In some cases may the record keeping has to change Lack of time and resources Lack of staff time, cost of developing FCA, missing equipment Financial disclosures – Internal opposition FCA could expose high unit cost or inefficiency and might lead to the elimination of favored projects (Love killer)

17 “Costs” vs. “Costs” The understanding of the term “costs” can differ between the interest of different groups. project profitability ROI capital investment market share profit centre cost allocation overhead costs unit price CDO incinerator ban regulatory compliance wastewater energy efficiency dioxin recycling With the “cost translation”, the business and the environmental manager can communicate and co-operate more effectively.

18 What are environmental costs?
Definition: Environmental costs are impacts, both monetary and non-monetary incurred by a firm or organization resulting from activities affecting environmental quality. These costs include conventional costs such as buildings, equipment, materials, labor and utilities, as well as potentially hidden and less tangible costs. (Graff, R.G., et al.: Snapshots of Environmental cost accounting)

19 Key Terms: Environmental Accounting (EA)
Refers to the incorporation of environmental cost and benefit information into a variety of accounting practices Environmental managerial accounting (EMA): Provides information to internal decision-makers in support of various internal management decisions. Unlike financial accounting, disclosure of managerial accounting information to an external audience is totally discretionary and practices are not regulated Life cycle: Of a product is the series of stages spanning the product's useful life from acquisition, use, reuse, and final disposition Life cycle costing: Are the costs accrued throughout the life cycle stages of a product and is used to refer to incorporating environmental accounting into process and product design.

20 Position of EA – e.g. waste management
Financial Management Environmental Management FCA – Full cost accounting Integrated waste Management Environmental Accounting EA can be seen as link in the environmental and accounting framework which combines the environmental and accounting needs and helps the understanding of both groups

21 EMA in the accounting framework
Environmental Accounting Hospital (microeconomic) Financial Accounting (regulated) Environmental Managerial Accounting (unregulated) External financial reporting Internal decision making EMA can be seen as internal tool for the decision maker and includes the environmental aspects and costs in a FCA

22 Why do EMA? Environmental costs and performances deserve management attention for the following reasons: Reduction or elimination of environmental costs as a result of business decisions Environmental costs may be obscured in overhead accounts or otherwise overlooked Improved environmental performances and significant benefits to human health – a step towards ISO 14000 Competitive advantage with patients from environmentally sound services More accurate costing and pricing of services can aid hospitals in the design of more environmentally preferable processes

23 Business success by EMA?
Dow Jones Sustainability World Index – Environmental sound management shows success! 330.00 280.00 230.00 180.00 130.00 80.00 12/93 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97 6/98 12/98 6/99 12/99 6/00 12/00 6/01 Dow Jones Sustainability World Index Dow Jones Global Index (USD, Price Index)

24 Scale – depending on the hospital needs and goals:
Scale and Scope of EMA: Scale – depending on the hospital needs and goals: Individual process or group of processes On a system (e.g. singular waste stream) Ward, Department or the entire Hospital Scope – depending on the hospital needs and goals: Conventional costs Hidden costs Contingent costs Relationship / image costs Societal costs

25 Hierarchy of purchasing criteria:
Example: Purchasing Hierarchy of purchasing criteria: Clinical efficacy Cost of acquisition % Cost of storage Cost of utilization % Cost of disposal Cost of obsolescence Labor cost Regulatory cost Cost avoidance potential

26 EMA application in purchasing
EMA for supporting purchasing decisions: Clinical effectiveness Conventional costs: Cost of acquisition, storage and disposition of the product Environmental costs Disposal costs Labor costs (training, tracking, PPE, etc.) Contingent costs Regulatory costs

27 Barriers for EMA application in purchasing
While EMA is today widely used in the industry for making purchasing decisions, in the healthcare sector it can hardly be found. Main reasons: Absence of easily available cost information Strong belief that the marginal cost of obtaining requite data exceeds its marginal benefit It can be noticed that while hospitals have a quite detailed knowledge available regarding costs and quantities of products entering the facility, there is far less awareness of the materials streams leaving the facility.


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