Managerial Cost

By Abdulla Israr & Simran Rani

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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