Chapter V Core Cost Concepts
Up to this point we looked at the relationship of cost information to decision making, discussed the uses of cost analysis, and examined how to define a service and establish unit measures of services delivered. This chapter discusses various cost concepts and procedures for performing a cost analysis. In particular, this chapter presents terminology and definitions and a discussion of the relationship between various cost concepts and possible management responses to improving the efficient deliver of services. At the end of this chapter we examine the relationship of cost and pricing decisions.
Direct costs are usually subdivided into personnel costs consisting of wages and benefits, and other direct costs (sometimes called non-personnel costs) consisting of equipment used and supplies consumed in the delivery of a service. For most services, personnel costs will be the lion’s share of the total direct cost of providing a given service. However, the nonpersonnel costs should never be ignored in a cost analysis because they can be a significant fraction of the total direct cost. Therefore, an improved method for the use of equipment can be a major technique in either controlling or reducing personnel costs.. Exhibit 6 presents a checklist of basic direct and indirect costs relevant for a wide range of cost analyses. Suggested data sources are indicated, along with common problems associated with obtaining accurate data. Exhibit 6 “Check List of Direct and Indirect Costs” Type of Cost Wages Direct X Indirect Data Sources Payroll Records Personnel Office Cautionary Comments Are lump sum payments (e.g., longevity) included? Do overtime payments distort the figures? (Is someone working “time” on one function but “overtime” on another? Are adjustments for overtime needed?
Pay Plans Vacation Personal Days Sick Leave Other Leave Insurance X X X X X Contracts Contracts Contracts Contracts X
Is sick leave... [continues]
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