Managerial Cost
MANAGERIAL COST
Introduction
- Refers
to internal cost information used by managers for planning,
decision-making, and control.
- Focuses
on cost efficiency, performance evaluation, and strategic
financial decisions.
- Unlike
financial accounting, it is not shared externally.
Types
a) Fixed Costs
- Do
not change with the level of output.
- Examples:
Office rent, equipment depreciation, salaries of top-level executives.
b) Variable Costs
- Fluctuate
directly with production or service levels.
- Examples:
Cost of raw materials, medical supplies, electricity for machines.
c) Semi-Variable Costs (Mixed Costs)
- Include
both fixed and variable components.
- Examples:
Telephone bills (fixed rental + usage), repair and maintenance charges.
d) Direct Costs
- Costs
that can be directly linked to a specific product, service, or department.
- Examples:
Medicine used for a particular patient, salary of a surgeon during an
operation.
e) Indirect Costs (Overheads)
- Not
directly attributable to a specific service or unit.
- Examples:
Hospital administration expenses, housekeeping, utilities.
Components
a) Cost Allocation
- Assigning
indirect costs to departments or services using formulas or ratios.
b) Cost Control
- Monitoring
actual expenses against planned budgets to avoid overspending.
c) Budgeting
- Planning
future income and expenditure based on goals and past data.
d) Break-even Analysis
- Determines
the point at which total revenue equals total cost (no profit, no loss).
e) Cost-Volume-Profit (CVP) Analysis
- Assesses
how changes in cost and sales volume affect operating profit.
Importance
a) Supports Informed Decision-Making
- Helps
management choose between options (e.g., outsourcing vs in-house
services).
b) Improves Cost Efficiency
- Identifies
areas of wastage and enables corrective actions.
c) Assists in Budget Preparation
- Accurate
cost estimates help create realistic financial plans.
d) Performance Evaluation
- Helps
assess efficiency of departments and staff through cost-performance
comparisons.
e) Strategic Planning
- Guides
long-term investment and service expansion decisions.
Application in Hospitals
a) Cost Per Patient
- Helps
calculate per-patient cost in OPD, IPD, ICU, etc.
b) Department-wise Budgeting
- Allocates
costs to surgery, radiology, pathology, emergency, etc.
c) Pricing of Services
- Supports
decisions on service charges (e.g., diagnostic tests, surgery fees).
d) Resource Allocation
- Ensures
optimal utilization of hospital resources based on cost-effectiveness.
e) Monitoring Non-revenue Areas
- Tracks
cost performance of non-clinical departments like housekeeping or laundry.
Video Description
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