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1、,Cost analysisHengjin Dong, MA, MD, PhD,Cost analysis,What is cost Cost classification Cost discounting Dealing with capital cost Allocation of overhead costs Some value problems in cost analysis Cost analysis,What is cost,Cost is the resources used in a program. The range of costs is influenced By
2、viewpoint. Example, patient travel costs, from patient point of view, society point of view, and health facility point of view? By length of the period you are going to evaluate.,Various definitions of cost,Total cost: cost of producing a particular quantity of output. Fixed cost: costs which do not
3、 vary with the quantity of output in the short run, but can vary with time. Variable cost: costs which vary with the level of output. Average cost: cost per unit of output. Marginal cost: the extra cost of producing one extra unit of output.,Short-Run and Long-Run Costs,Short run is the decision-mak
4、ing period during which at least one input is considered fixed. Long run is a planning horizon that looks beyond current commitments to a future period in which all inputs can be varied.,Short-Run Cost Curves,We will first define some terms, then evaluate a hypothetical example and plot the data to
5、illustrate cost curves. Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC) Average Fixed Cost (AFC) = TFC/Q Average Variable Cost (AVC) = TVC/Q Average Total Cost (ATC) = TC/Q Marginal Cost (MC) = TC/ Q,Opportunity Costs,The opportunity cost of an asset (or, more generally, of a ch
6、oice) is the highest valued opportunity that must be passed up to allow current use. Explicit costs are expenses for which one must pay with cash or equivalent. Implicit costs do not involve a cash transaction, and so we use the opportunity cost concept to measure them.,Incremental, Sunk and Unit Co
7、sts,Incremental cost is the additional costs that one service or programme imposes over another. Sunk costs are those parts of the purchase cost that cannot later be salvaged or modified through resale or other changes in operations. Unit cost is the cost per unit of output.,Cost classification,Acco
8、rding to the relationship to a program Direct cost indirect cost intangible cost According to accounting principles capital cost operating cost,Capital costs and operating costs,Capital cost are the costs to purchase the major assets required by the programme; general equipment, buildings and land.
9、Operating costs are the recurrent costs including salaries, transport and travel, operations and maintenance (electricity etc.), supplies, drugs and vaccines, rent and training.,Characteristics of capital costs,They represent investments at a single point in time, often at the beginning of the progr
10、amme. They are often not listed in the accounts or budgets of the organization. They represent an investment in an asset which is used over time. There are two components of capital cost. Opportunity cost of the funds tied up in the capital asset, such as land. Depreciation over time of the asset it
11、self.,How to estimate costs?,Market prices will be available for many of the resources items. Opportunity cost, theoretical proper but difficult in practice. Non-market items valued by market wage rate,Allowance for differential timing of costs,Discounting, resulting from time preference why? Short-
12、term view of life The future is uncertain Individuals might expect to be more wealthy in the future Can obtain a positive return when making a riskless investment,Cost discounting formula,Choice of discount rate,The real rate of return forgone in the private sector (the social opportunity cost appro
13、ach). The social rate of time preference, is a measure of societys willingness collectively to forgo consumption today in order to have greater consumption tomorrow. The interest rate on a risk-free investment (e.g. long-term government bonds) represents the individual investors willingness to forgo
14、 the present for the future. Using the discount rate announced by government for all public sector projects, 5% in UK and 3% in America.,Discounting exercise,How to deal with capital costs?,To calculate the equivalent annual cost by discounting method, considering the useful life of the asset To det
15、ermine the depreciation cost each year using an accounting method To use market rates for the rental of buildings or lease of equipment,Costing capital - depreciation,Decide the life of a piece of equipment, consider the physical life and useful clinical life. Straight line depreciation: the cost of
16、 an asset is divided by the number of expected years of useful life to give a constant annual cost over the life-span of the asset. Declining balance depreciation: a constant proportion of an asset is consumed in each year.,Example of depreciation,Value of an asset is 1000 10 years life 20% declinin
17、g each year,Allocation of overhead costs,Direct allocation,Concept of overhead costs,An accounting term for those resources that serve many different departments and programmes, e.g. general hospital administration, central laundry, medical records, cleaning, porters, power, etc. If individual programmes are to be costed, these shared costs may need to be attributed to programmes. There is no unambiguously right way to apportion such costs.,
