- Email: [email protected]
FUNCTIONAL COSTING FOR HOSPITALS ON A " STANDARD " BASIS
301
organisms. Surgical demonstrations BROWNE
(London)
were
give!} by DEwis
on the treatmentof various oongènitdl
deformities, and by HOLMES SELLORS (London) and abnormal pulmonary arteries.
on
’
ectopic lung
-, ,
Among the other exhibits, those of Coccxr (Florence) on the physiological pathology of the cerebrospinal fluid and of SARNOFF (Boston) on electrophrenic respiration attracted
particular
attention.
Those who know best the lakes and mountains of Switzerland may have been surprised to find how beautiful her largest city is also ; the spaciousness, the abundance of trees and flowers, and the lakeside setting made a ,perfect background for a memorable congress. Members will remember above all the kindly hospitality of the Swiss, who received so many into their homes, and those who worked so hard to make the congress a successProf. Fanconi the distinguished president, Dr. Zellweger the general secretary, Dr. Gasser chairman of the exhibitions, and Dr. Rossi who had the enormous task of arranging accommodation. The next International Congress of Paediatrics will be held in Havana in 1953 under the presidency of Prof. Felix Hurtado.
-
A full programme of excursions and visits included tours of the Kinderspital and the new Kantonsspital and of the refugee orphan children’s village Pestalozzi at Trogen. The social arrangements included a steamer trip on the lake of Zurich, and a dinner followed by folksongs and dancing, while there was a full programme of excursions and " guidances " for the ladies.
’
"
Special
Articles
FUNCTIONAL COSTING FOR HOSPITALS ON A " STANDARD " BASIS
D. M. LIVOCK A.C.A.
STANDARD costing is an accounting technique whereby the cost of any enterprise can be compared with a fixed measure-the standard cost-and the reasons for any deviation from that standard are shown in relation to all components of the cost. It combines the usual financial accounting with information about current costs, and it shows clearly the reasons for the difference between current cost and the standard. In the past; standardcosting has been applied in this country solely in industry and has been found of great value to management as a method of control. Probably the full application of the - system to hospitals is impossible, but there is no reason why the underlying principles should not be adapted. to hospital finance. It is now widely acknowledged that functional departmental costing will enable comparisons to be made between the cost of similar services given in similar hospitals. (For example, the cost of feeding a patient should not vary greatly from hospital to hospital, and a comparison of the cost of a unit of heating should give enlightening information on the economics of the different methods in use.) But the defect of departmental costing as a method of control is that it does not distinguish between variable and fixed expenditure, and estimates based on past departmental cost are entirely vitiated if changes take place in the usage, of the department. If it were based on standards it would give departmental cost, and at the same time enable budgets to be adjusted to meet current changes in the volume of service given. A PRACTICAL DEMONSTRATION
One experiment in departmental costing on a standard basis has been started in cooperation with the Nuffield Provincial Hospitals Trust in a provincial teaching hospital. Here it happened to be desirable to know the cost for each ward, and the system as applied is more complicated than would be necessary in other teaching hospitals, and certainly in non-teaching hospitals. A full departmental costing system had been in use at the hospital for the past ten years, and the introduction of a standard was fairly simple, since all the relevant information was available. The new system began on April 1, 1949. The hospital organisation was divided into departments which are regarded as cost centres. These fall naturally into two main groups : "
Service
" departments providing services used by other departments and not directly concerned with diagnosis or treatment.
Patient
and
" departments concerned directly contributing to diagnosis and treatment.
with
patients
For each department a unit of production was chosen For service departments the unit is one which bears relation’to the services given to other departments and which can serve as the basis of the allocation of their For patient departments cost to patient departments. the unit is one which will best enable the cost of various treatments to be compared, and which will allow the cost of a patient or of a patient-day to be calculated showing the different components of the cost, such as the maintenance cost of a patient and the cost of the special treatments and diagnostic services used by the
(table i).
patient. The estimate of the first standard cost per unit reached in the following way :
was
An estimate was made of departmental expenditure for the year based on information for the past adjusted to cover known changes in the future. This was the first standard cost.
An estimate was then made of the number of units which each department would produce during the year, based on information for the past of total possible production adjusted if necessary to the number which it was thought would be required from the department. This was the first standard number of units. . A simple division of the standard number of units into the standard cost gave the first standard cost per unit. *
,.
These first standards were of course far from reliable, but a start had to be made somewhere. At the end of the TABLE I—MAIN HOSPITAL DEPARTMENTS AND UNITS
OF
PRODUCTION
Serrice Departments Works department Boiler house
Laundry Kitchen
Sewing-room Staff canteen Staff residence (domestic,
Unit of Production Man hours Tons of fuel used Pounds washed Meals served Pieces repaired or made Meals served
nursing, medical, &c.) Training-schools *C’hapel *Telephone *Administration
Patient Departments *Almoner Ambulances
Dispensary *Records and admission Laboratories
Radiology { diagnosis
treatment Physiotherapy Occupational therapy Operating-theatres
Outpatients Casualty Medical wards Surgical wards Special wards (e.g., mater-
nity,
Staff days Trainee dayss Patient days New outpatients and New outpatients and
new
new
New outpatients and new Miles run
Prescriptions New outpatients and Specimens examined Investigations made
new
inpatients inpatients
inpatients inpatients
Treatments given
Treatments given New inpatients
Operating-hours Attendances Attendances Patient days Patient days
children, E.N.T.. long-stay,
neurosurgery,
pay-beds, &c.)
Patient days * In these departments it is difficplt to say that any unit is produced and the unit given is the one used as a basis for the allocation of cost to the other departments.
302 TABLE II—DEPARTMENTAL OPERATING STATEMENT FOR 12 MONTHS FOR A 30-BEDDED THE ACTUAL UNITS THE STANDARD NUMBER OF UNITS IS 8760 PATIENT-DAYS ;; VARIATION DUE TO THIS DIFFERENCE IS SHOWN AS A PERFORMANCE VARIANCE IN COL.
WARD WITH 80%
year the standard was revised in the light of then available and of a moreprecise definition of departmental expenditure and activity. as it is incurred. Expense is allocated to This arises from three main sources-direct cost of Materials,, direct cost of labour, and indirect cost. Direct cost of materials consists of materials purchased especially for the department, materials issued from stores, and, in patient departments, drugs issued from the dispensary and the cost of patients’ food. Each source is separately accounted for so that variances in cost may be easily seen and traced to their cause. Materials issued from stores are grouped under the same headings as the supplies officer uses for the stores’ records. Materials are priced out to departments at a standard price, and any variance appearing on the depart-
first
the information
departments
mental statement thus arises from differences in consumption, and the effect of price variation is only shown for the hospital as a
whole.
Direct cost
of labour is arrived at by an analysis of the hospital pay-roll. Variation will occur through changes in hours
worked and in rates of pay. Indirect cast consists solely of those items of expenses attributable to the buildings as a whole and is spread over departments on an agreed basis. A periodical statement is prepared for each department comparing the-actual cost of its running with the estimated standard cost (table II). A summary of these departmental statements shows the position for the hospital as a whole. If it is thought necessary to arrive at the total cost of any patient department, a further statement is prepared showing the allocation of the cost of service departments to the patient -
department. DISCUSSION I have given no details of the method employed in this particular hospital in arriving at the costs, for the idea of working on a standard basis was grafted on to an existing system originally designed for other purposes.! But the experiment is an attempt to provide information of the administration and for purposes of When similar experiments have been carried out in other hospitals or groups of hospitals it will be possible to arrive at some idea of the best methods to be employed, of the ’cost of costing, and of the best use which can be made of the results. But it seems clear that a system based on these principles has the following advantages : It affords a scientific basis for annual estimates. It gives an automatic control over budgets, consumption, and stock, more especially as the original estimate is varied according to changes in the services produced.
for the
use
comparison.
,
’
1. This
system
was
described in the Accountant, 1940, 102, 45.
OCCUPATION.
8000 PATIENT-DAYS.
THE
’
6
By basing departmental analysis on a standard price, it shows the result of variation in price of materials arising from change in price-levels or in buying policy. It enables each departmental-head to be aware of variations in such expenditure as he is able to control. ’ It provides a basis for comparison of, hospital cost at the national or regional level by a comparison between the standard cost of departmental units of production in individual hospitals and between the number of units It would in the course of time enable a standard cost to be ascertained for all hospital departments, from which a standard cost could be built up, for individual hospitals according to the departments they contained. This standard. would provide a method of control of expenditure at regional and national levels. When cost information is available for a number of hospitals and for a period of years, it should give a useful indication of the best size of departments and hospitals, and of the most efficient methods of providing various services, and it should enable estimates to be made of the cost of the provision of additional services. Variation in the standard cost of departments in individual hospitals should show the effect on cost of bed-occupation and of varying methods of administration. The statistics automatically collected for arriving at unit costs can be used for other purposes. They can, for instance, show to what extent the special departments are used by different types of patient. ’
produced.
’
Now that financial control is vested in hospital managedealing with a group of hospitals, the unit of administration is big enough for the accounting system to be properly planned and organised. With such a unit the analysis of expenditure under departmental headings, rather than the headings of expenditure at present required, should not entail any great additional labour, especially as some me’chanisation would be possible. The collection of the other data necessary for the calculation of the standard cost could sometimes be made part of the accounting system, and sometimes could be obtained from patient-records without much alteration or addition. But it is important, that, if the fullest use is to be made of any costing system, information should always be up to date. It must be available as soon as possible after the end of each financial period, and each period should not be too long. To introduce costing, however, will not by itself ensure efficient administration. Costing is not a cure for inefficiency, though it is as essential to good management as the use of X-ray and other diagnostic services are to a good doctor. But the results must be presented in a useful and intelligible form to the administrator, who must be willing to -accept and use’ this new and effective weapon. ment committees
organisms. Surgical demonstrations BROWNE
(London)
were
give!} by DEwis
on the treatmentof various oongènitdl
deformities, and by HOLMES SELLORS (London) and abnormal pulmonary arteries.
on
’
ectopic lung
-, ,
Among the other exhibits, those of Coccxr (Florence) on the physiological pathology of the cerebrospinal fluid and of SARNOFF (Boston) on electrophrenic respiration attracted
particular
attention.
Those who know best the lakes and mountains of Switzerland may have been surprised to find how beautiful her largest city is also ; the spaciousness, the abundance of trees and flowers, and the lakeside setting made a ,perfect background for a memorable congress. Members will remember above all the kindly hospitality of the Swiss, who received so many into their homes, and those who worked so hard to make the congress a successProf. Fanconi the distinguished president, Dr. Zellweger the general secretary, Dr. Gasser chairman of the exhibitions, and Dr. Rossi who had the enormous task of arranging accommodation. The next International Congress of Paediatrics will be held in Havana in 1953 under the presidency of Prof. Felix Hurtado.
-
A full programme of excursions and visits included tours of the Kinderspital and the new Kantonsspital and of the refugee orphan children’s village Pestalozzi at Trogen. The social arrangements included a steamer trip on the lake of Zurich, and a dinner followed by folksongs and dancing, while there was a full programme of excursions and " guidances " for the ladies.
’
"
Special
Articles
FUNCTIONAL COSTING FOR HOSPITALS ON A " STANDARD " BASIS
D. M. LIVOCK A.C.A.
STANDARD costing is an accounting technique whereby the cost of any enterprise can be compared with a fixed measure-the standard cost-and the reasons for any deviation from that standard are shown in relation to all components of the cost. It combines the usual financial accounting with information about current costs, and it shows clearly the reasons for the difference between current cost and the standard. In the past; standardcosting has been applied in this country solely in industry and has been found of great value to management as a method of control. Probably the full application of the - system to hospitals is impossible, but there is no reason why the underlying principles should not be adapted. to hospital finance. It is now widely acknowledged that functional departmental costing will enable comparisons to be made between the cost of similar services given in similar hospitals. (For example, the cost of feeding a patient should not vary greatly from hospital to hospital, and a comparison of the cost of a unit of heating should give enlightening information on the economics of the different methods in use.) But the defect of departmental costing as a method of control is that it does not distinguish between variable and fixed expenditure, and estimates based on past departmental cost are entirely vitiated if changes take place in the usage, of the department. If it were based on standards it would give departmental cost, and at the same time enable budgets to be adjusted to meet current changes in the volume of service given. A PRACTICAL DEMONSTRATION
One experiment in departmental costing on a standard basis has been started in cooperation with the Nuffield Provincial Hospitals Trust in a provincial teaching hospital. Here it happened to be desirable to know the cost for each ward, and the system as applied is more complicated than would be necessary in other teaching hospitals, and certainly in non-teaching hospitals. A full departmental costing system had been in use at the hospital for the past ten years, and the introduction of a standard was fairly simple, since all the relevant information was available. The new system began on April 1, 1949. The hospital organisation was divided into departments which are regarded as cost centres. These fall naturally into two main groups : "
Service
" departments providing services used by other departments and not directly concerned with diagnosis or treatment.
Patient
and
" departments concerned directly contributing to diagnosis and treatment.
with
patients
For each department a unit of production was chosen For service departments the unit is one which bears relation’to the services given to other departments and which can serve as the basis of the allocation of their For patient departments cost to patient departments. the unit is one which will best enable the cost of various treatments to be compared, and which will allow the cost of a patient or of a patient-day to be calculated showing the different components of the cost, such as the maintenance cost of a patient and the cost of the special treatments and diagnostic services used by the
(table i).
patient. The estimate of the first standard cost per unit reached in the following way :
was
An estimate was made of departmental expenditure for the year based on information for the past adjusted to cover known changes in the future. This was the first standard cost.
An estimate was then made of the number of units which each department would produce during the year, based on information for the past of total possible production adjusted if necessary to the number which it was thought would be required from the department. This was the first standard number of units. . A simple division of the standard number of units into the standard cost gave the first standard cost per unit. *
,.
These first standards were of course far from reliable, but a start had to be made somewhere. At the end of the TABLE I—MAIN HOSPITAL DEPARTMENTS AND UNITS
OF
PRODUCTION
Serrice Departments Works department Boiler house
Laundry Kitchen
Sewing-room Staff canteen Staff residence (domestic,
Unit of Production Man hours Tons of fuel used Pounds washed Meals served Pieces repaired or made Meals served
nursing, medical, &c.) Training-schools *C’hapel *Telephone *Administration
Patient Departments *Almoner Ambulances
Dispensary *Records and admission Laboratories
Radiology { diagnosis
treatment Physiotherapy Occupational therapy Operating-theatres
Outpatients Casualty Medical wards Surgical wards Special wards (e.g., mater-
nity,
Staff days Trainee dayss Patient days New outpatients and New outpatients and
new
new
New outpatients and new Miles run
Prescriptions New outpatients and Specimens examined Investigations made
new
inpatients inpatients
inpatients inpatients
Treatments given
Treatments given New inpatients
Operating-hours Attendances Attendances Patient days Patient days
children, E.N.T.. long-stay,
neurosurgery,
pay-beds, &c.)
Patient days * In these departments it is difficplt to say that any unit is produced and the unit given is the one used as a basis for the allocation of cost to the other departments.
302 TABLE II—DEPARTMENTAL OPERATING STATEMENT FOR 12 MONTHS FOR A 30-BEDDED THE ACTUAL UNITS THE STANDARD NUMBER OF UNITS IS 8760 PATIENT-DAYS ;; VARIATION DUE TO THIS DIFFERENCE IS SHOWN AS A PERFORMANCE VARIANCE IN COL.
WARD WITH 80%
year the standard was revised in the light of then available and of a moreprecise definition of departmental expenditure and activity. as it is incurred. Expense is allocated to This arises from three main sources-direct cost of Materials,, direct cost of labour, and indirect cost. Direct cost of materials consists of materials purchased especially for the department, materials issued from stores, and, in patient departments, drugs issued from the dispensary and the cost of patients’ food. Each source is separately accounted for so that variances in cost may be easily seen and traced to their cause. Materials issued from stores are grouped under the same headings as the supplies officer uses for the stores’ records. Materials are priced out to departments at a standard price, and any variance appearing on the depart-
first
the information
departments
mental statement thus arises from differences in consumption, and the effect of price variation is only shown for the hospital as a
whole.
Direct cost
of labour is arrived at by an analysis of the hospital pay-roll. Variation will occur through changes in hours
worked and in rates of pay. Indirect cast consists solely of those items of expenses attributable to the buildings as a whole and is spread over departments on an agreed basis. A periodical statement is prepared for each department comparing the-actual cost of its running with the estimated standard cost (table II). A summary of these departmental statements shows the position for the hospital as a whole. If it is thought necessary to arrive at the total cost of any patient department, a further statement is prepared showing the allocation of the cost of service departments to the patient -
department. DISCUSSION I have given no details of the method employed in this particular hospital in arriving at the costs, for the idea of working on a standard basis was grafted on to an existing system originally designed for other purposes.! But the experiment is an attempt to provide information of the administration and for purposes of When similar experiments have been carried out in other hospitals or groups of hospitals it will be possible to arrive at some idea of the best methods to be employed, of the ’cost of costing, and of the best use which can be made of the results. But it seems clear that a system based on these principles has the following advantages : It affords a scientific basis for annual estimates. It gives an automatic control over budgets, consumption, and stock, more especially as the original estimate is varied according to changes in the services produced.
for the
use
comparison.
,
’
1. This
system
was
described in the Accountant, 1940, 102, 45.
OCCUPATION.
8000 PATIENT-DAYS.
THE
’
6
By basing departmental analysis on a standard price, it shows the result of variation in price of materials arising from change in price-levels or in buying policy. It enables each departmental-head to be aware of variations in such expenditure as he is able to control. ’ It provides a basis for comparison of, hospital cost at the national or regional level by a comparison between the standard cost of departmental units of production in individual hospitals and between the number of units It would in the course of time enable a standard cost to be ascertained for all hospital departments, from which a standard cost could be built up, for individual hospitals according to the departments they contained. This standard. would provide a method of control of expenditure at regional and national levels. When cost information is available for a number of hospitals and for a period of years, it should give a useful indication of the best size of departments and hospitals, and of the most efficient methods of providing various services, and it should enable estimates to be made of the cost of the provision of additional services. Variation in the standard cost of departments in individual hospitals should show the effect on cost of bed-occupation and of varying methods of administration. The statistics automatically collected for arriving at unit costs can be used for other purposes. They can, for instance, show to what extent the special departments are used by different types of patient. ’
produced.
’
Now that financial control is vested in hospital managedealing with a group of hospitals, the unit of administration is big enough for the accounting system to be properly planned and organised. With such a unit the analysis of expenditure under departmental headings, rather than the headings of expenditure at present required, should not entail any great additional labour, especially as some me’chanisation would be possible. The collection of the other data necessary for the calculation of the standard cost could sometimes be made part of the accounting system, and sometimes could be obtained from patient-records without much alteration or addition. But it is important, that, if the fullest use is to be made of any costing system, information should always be up to date. It must be available as soon as possible after the end of each financial period, and each period should not be too long. To introduce costing, however, will not by itself ensure efficient administration. Costing is not a cure for inefficiency, though it is as essential to good management as the use of X-ray and other diagnostic services are to a good doctor. But the results must be presented in a useful and intelligible form to the administrator, who must be willing to -accept and use’ this new and effective weapon. ment committees