Critical Analysis Of Costs And Accounting In Health And Social Care

Overview of Task 1

Critical Analysis of concepts of Cost and Accounting in Decision Making

In any business, the role of cost and accounting is an integral part of the overall management process of a health and social care company. The management of costs have direct impact on the surplus which is generated by health companies. In this case the company which is considered is Anchor Trust which is a non-profit seeking business which provides homes, care and security to people above 55 years of age and therefore the income which is generated by the business is shown as surplus in the annual reports of the business for the year 2018. In cost accounting, the business segregates different activities on the basis of cost units in order to effectively identify the costs which are incurred by the business.

In general terms there are three types of costs which are material costs which are related to the costs incurred on raw materials procurement, labour costs which is related to the cost of workers and employees who are working for the company and overhead costs which are indirect costs and are not directly incurred by the business. The annual report of Anchor Trust which is considered for 2018 shows different types of costs which are incurred by the business during the years and the same is recorded in order to estimate the net surplus which is generated by the business (Anchor.org.uk. 2018). The businesses are also anticipated to follow costing principles and various techniques which are associated with costs in order to appropriately measure the cost component of the business.

In initial years when cost accounting was introduced, health and social care units usually operated under a fixed budget system and the only component which was measured at that time was the expenditure which was incurred by the business. However, the same has changed significantly in modern times, the cost accounting system appropriately provides breakup of the costs which is incurred by the business and the costs are allocated on the basis of cost centers and costs units which are mostly used in costing system. The cost centers are further divided into performance center which is quite an effective system for a health and social care business.

The overall importance of the costing accounting system in Anchor Trust is listed below in details:

• The costing system effectively allocates costs on the basis of cost units and the costs which are incurred by the business can be clearly be identified as material, labour, overhead costs and on the basis of nature whether the same is direct or indirect costs.
• The costing techniques which can be used by the business helps in measuring the costs of the business effectively and thereby also compute the net surplus which is generated by the business.
• The costing system allows the management of the company to make decisions which are benefits for the business and the same can result in improvement in the overall businesses structure of the company.

The financial statements which is prepared by the business of Anchor Trust is as per the generally accepted framework which is followed by all companies. The financial statement which is prepared by Anchor Trust comprises of a statement of comprehensive income, statement showing changes in equity, statement showing financial position and the cash flow statement. The statement of comprehensive income shows that the overall revenue which is generated by the business has increased significantly from previous year analysis. This means that Anchor Trust has provided more services to the people in 2018. The increase in the turnover suggest that the business is moving in a favorable direction. The operating surplus which is generated by the business has also increased and the same is shown to be £ 22,652,000 for the year 2018. The overall surplus of the business for the year has slightly increased which is mainly due to higher operating costs of the business. However, this can be expected from a non-profit making company and therefore the results which are shown in the comprehensive statement are mostly favorable for the business.

Importance of Cost and Accounting Principles

 The statement showing financial position of the business shows a decrease in the fixed assets which is not a favorable sign for the business. The decrease in the fixed assets of the business suggest that the management of the company has sold some of the assets of the business and the same has resulted in the fall in the value of the assets as shown in the statement (Ehiedu 2014). There is an increase in the current assets of the business which is a favorable sign for the business as the same signifies that the liquidity situation of the business has improved and the business has more funds in their hands. These funds can be then used by business to finance any obligations or projects which the business wishes to undertake. The annual report also shows that the business has also made short term investments however the same is shown to be lower than previous year analysis. The balance of cash and cash equivalent which is obtained from the cash flow statement which is prepared by the business is also shown to be appropriate as the same exhibits an increase in the figures in comparison to previous year figure. The cash balance is shown to have increased and this is positive thing for the business and the business can easily undertake any project which requires sufficient amount of funds for the business. On the basis of the analysis of the annual report of the business, it can be stated that the business is performing well however certain areas can still be improved by the management of the business.

In costing system, the role of budgetary process is immense in determining the costs and profits which can be generated by the business. The application of budgets can also be used for the purpose of maintaining supervision and control over the activities of the business (Jones et al. 2013). The budgets which are prepared businesses are also used for the purpose of forecasting of future costs and revenue which can be generated by the business.

In a health and social care organization which are non-profit in nature such as Anchor Trust, the role which is played by budgetary control is immense. This is because, most of organization operates on grants and therefore the businesses are responsible for keeping track of the expenses which is incurred by the business. The budgets allow the businesses to plan ahead relating to how the costs are to be handled and how much revenue needs to be generated by the business. In a non-profit seeking organization, budgets are important as they act as a guide to the employees relating to different activities which are undertaken by them and ensure that the same are as per the goals and objectives of the business (Miller and Power 2013). The budgets are commonly used by non-profit seeking organizations for the purpose of ensuring that a comparative study can be conducted in order to measure the current performance of the business with past year performance.

Critical Analysis of Financial Statements

In addition to this, there are various types of budget which are available to non-profit organization but just like all other businesses, the management of Anchor Trusts follow the master budget approach which allows the business to prepare one budget which includes all estimates which are related to a non-profit seeking organization. In some cases as well, the budgets which are prepared by such non-profit seeking organization are requested by banks and financial institution when the business is applying for credit facilities. The budgeting process which is used by Anchor Trust is flexible budgeting which can effectively record all expenses which are incurred by the business and also turnover which is generated by the business. The budgets are used along with standard costing measures so that if any variances take place between the actual and budgeted figures, the reason for such a variance can be investigated.

Ratio analysis is a tool which is used by business in order to determine the performance of business in different areas of business such as profitability, solvency, liquidity and efficiency (Al Karim and Alam 2013). The key financial ratios are considered to be financial indicators for success of a business and in case of Anchor Trust some key ratios of profitability, liquidity and efficiency are computed in the table shown below:

Profitability Ratios

	Profitability Ratios
Particulars	2018	2017	2016
	£000	£000	£000
Total Revenue	389,062	374,709	367,327
Materials & Consumables Used	366,410	359,441	341,106
Net Profit	10,981	10,553	12,278
Total Assets	851,255	859,648	879,583
Operating Surplus	22,652	14,553	23,125
Operating Profit Margin	5.82%	3.88%	6.30%
Net Profit Margin	2.82%	2.82%	3.34%

The above table effectively shows profitability ratios of Anchor Trust which represent the aspect of profitability of the business. The ratios are computed for a period of three years and the same is computed considering the figures which are available from the annual report of the business (Omar et al. 2014). The operating profit margin of the business is shown to have increased in 2018 and the same is shown to be 5.38% for the year 2018 (Anchor.org.uk. 2018). The operating profit margin has increased in comparison to previous year estimate which suggest that the operational structure of the business has significantly improved from previous year estimate. The net profit of the business is computed considering the net surplus of the business and the same is shown to have increased marginally during the year (Ongore and Kusa 2013). The increase in the costs of the business is the main reason for low net surplus which is generated by the business.

The above figures shows graphical representation of the net profit margin of the business and the figure clearly shows that the estimate was maximum in 2016 and the same has gradually fallen in 2017 and 2018. The management of the company needs to improve the profitability aspect of the business.

	Liquidity Ratio
Particulars	2018	2017	2016
	£000	£000	£000
Current Assets	192,680	173,463	166,574
Current Liabilities	108,924	101,315	110,899
Inventory	144	145	136
Current Ratio	1.769	1.712	1.502
Quick ratio	1.768	1.711	1.501

The liquidity ratios of a business are considered to be an essential part for achieving success in a business. The above table shows the computation of current ratio and quick ratio of a business. The current ratio for the year 2018 is shown to be 1.769 which is much more than the estimate of 2017 and the same is shown to be 1.712. This signifies that the overall liquidity position of the business has improved significantly in comparison to previous year’s analysis. The quick ratio which is quite similar to current ratio also demonstrates similar results (Pervan and Kuvek 2013). Therefore, the overall liquidity ratio of the business shows that the business has an efficient liquidity position and therefore the business can effectively meet any current obligations of the business and also have sufficient funds for undertaking any project which the management of the company wishes to undertake.

Evaluation of Budgetary Process

The above graph shows the current ratio of the business and the estimate of 2018 is shown to be highest for the business. The current ratio in 2018 has shown significant improvement which suggest that the cash inflows of the business is appropriate.

Efficiency Ratio

	Efficiency Ratio
Particulars	2018	2017	2016
	£000	£000	£000
Inventory	144	145	136
Trade Receivables	46,201	43,865	52,716
Cost of Goods Sold	366410	359441	341106
Sales Revenue	389062	374709	367327
Inventory Turnover Ratio	2544.514	2478.903	2508.132
Receivables Turnover Ratio	8.421	8.542	6.968

The efficiency ratio of the business represents the effectiveness of the operational structure of the business. The efficiency ratio shows the management of the business and the effectiveness of the same. The inventory turnover ratio which is shown in the above table shows an increase in the estimate which suggest that the inventory management policy of the business is effective and efficient (Delen, Kuzey and Uyar 2013). The estimate for the current year is better than previous year’s estimate which suggest that the business is performing well in terms of inventory management. The receivable turnover ratio is shown to have fallen slightly which suggest that there has been a change in the policy of debtors for the company which may be that the credit period might have been increased. The management needs to focus on debtor’s turnover ratio and improving the same.

The above graph shows receivable turnover ratio of the business of Anchor Trust and the estimate for 2018 is shown to have slightly reduced in comparison to previous year analysis. The analysis also shows that the management has made changes to the debtor’s policy which is the reason the ratio has fallen slightly. The management needs to make improvements in the receivable turnover ratio in order to improve the overall efficiency of the business.

The decision which are to be taken by the business is to be based on the financial ratios of the business. The profitability ratio of the business is shown to have fallen slightly in terms of the net surplus which is generated by the business. The management needs to improve the costs of the business so that the net surplus which is generated by the business is enhanced. The net surplus of the business can also be increased by increase the scale of services which is offered by the business and thereby also increasing the turnover of the business (Nirajini and Priya 2013). In terms of liquidity, the business is doing well and has even enhanced the liquidity position of the business during the current year which shows that the business has financial strength and can effectively undertake any obligation which are current.

The management of the business needs to improve the efficiency of the business in terms of management of debtors as well inventory of the business. The management of the company needs to effectively set the credit policy so that the overall efficiency of the business is not hampered in any way. In addition to this, the management can initiate proper control over the business in order to ensure that there is no wastage of resources and no unproductive costs are incurred by the business. Thus on an overall basis, key financial ratios of the business highlights certain key areas of business and on the basis of which decisions can be taken for which aspects of the business needs improvement.

Costing Design and Costing System

Costing system forms an important area of a business which has direct impact on profitability of the business. The costing system are getting more and more emphasis in modern time mainly because appropriate control over the costs structure of a business can help a business in maintaining the profitability of the business and also leads to reduction in waste generation and unproductive resources wastage (Reineking et al. 2013). An effective cost accounting system allows businesses to appropriately identify, allocate and record the costs of the business on the basis of the products which are used by the business and also on the basis of persons which are served by the business. The importance of an effective cost system is very important in a health care business as well even if the health care business is non-profit seeking business. Healthcare organizations need to understand the relationship between cost of care and quality outcomes to maximize their ability to deliver high quality care at a lower cost (Rahim et al. 2014). This will allow the business to serve more clients and thereby also increase the area of coverage of the business.

The company which is considered for this assessment is Anchor trust limited and on the basis of the annual report of the business, it can be effectively established that the business is engaged in the process of providing health and social services for people who are above the age of 55 years. The company is non-profit seeking company and therefore most of the services which is provided by the business are for social cause (Anchor.org.uk. 2018). The main funds which are acquired by the business is in the form of grants which the business receives from the government. Therefore, it is imperative that the business keeps a track record of the expenses which are incurred by the business during the period. The management of the company has the policy of formulating budgets which can be used for the purpose of formulating strategies and target which the company wants to achieve (Matherly and Burney 2013). The cost system allows the business to effectively break down the cost units of the business and segregate the costs of the business on the basis of cost units of the business. The costs are then measured as per direct and indirect nature of the costs and then the same are further classified by the business on the basis of material, labour or overhead costs.

In order to identify the costs of the business, the annual report of the business is considered for the year 2018 (Anchor.org.uk. 2018). The annual report of Anchor Trust which is considered for 2018 shows different types of costs which are incurred by the business during the years and the same is recorded in order to estimate the net surplus which is generated by the business. The annual report of the business shows that the overall costs of the business in comparison to previous year estimate has increased which suggest that the management needs to device an appropriate strategy for the purpose of ensuring that the overall costs of the business is reduced.

In this case, the company which is selected is Anchor Trust which is engaged in the business of health and social care. The costs of the business which is demonstrated in the annual report of the business for the year 2018 is needed to be improved by the management. The management needs to reduce the unproductive costs and wastage in resources of the business in order to ensure that the stability in the cash inflows can be maintained by the business. The management needs to follow a proper budgeting system in order to keep the costs which are incurred by the business in check.

The pricing system of the business is also based on the fixed and variable costs which are incurred by the business. The price of the products which are offered by the business is based on the summation of the total costs which are incurred by the business in order to supply the product to the customers. The recommendations which can be suggested to the management of Anchor Trust in terms of pricing and costing policies are suggested below:

• The management needs to follow flexible budgeting system for the purpose of recording the costs of the business and also monitoring the costs and activities of the business.
• The management needs to ensure that no unproductive expenditure is undertaken by the business.
• The management can also incorporate standard costing techniques for the purpose of measuring and investigating any variances which occurs between the actual figures and the budgeted estimate of the business.
• The management also needs to follow Activity based costing for the purpose of measuring the costs of the business and the same would also ensure that the allocation and apportionment of overhead costs are appropriately done by the business(Kaspina, Khapugina and Zakirov 2014).

Budgeting is one of the most efficient techniques in cost accounting which can be used for the purpose of forecasting of expenses and revenues of the business for future years. There are various types of budgets which can be prepared by the management for the purpose of measuring and forecasting the cost associated with different departments (Kaplan and Atkinson 2015). One of the main advantages of budgeting is that the technique can be used by the business for measuring and monitoring the performance of the business as well as analyzing the reason for the variances which occurs between actual performance and standard set by the business. In the case of Anchor Trust, budgeting is an important process as most of the funds which are used by the business are acquired from grants and therefore it is necessary that the business maintains a track record of the expenses which are undertaken by the business for the period.

In order to create a budget, the management of the company firstly needs to set performance targets which the management wants to achieve. The targets which are set by the management should be estimated on the basis of analyzing the performance of past years and also on the basis of expectation of the management (Noreen, Brewer and Garrison 2014). The performance targets of Anchor Trust are to enhance the number of people which the company serves and also increase the sales of the medical products and supplements which are offered by the business (Schaltegger and Zvezdov 2015). The main motive of the business is to serve the people and increase the scale of operations of the business.

Master Budgets are compilation of all lower level budgets and the same covers different functional area of the business. The master budget are prepared by businesses for the purpose of forecasting all revenue and cost of the business and also control and measure the performance of such departments in an effective manner (Demski 2013). The table below shows the different budgets which is prepared by the management of Anchor Trust forecasting the costs and revenue which can be generated by the business for some future years (Almaree et al. 2015). The different budgets which are shown in the tables below are sales budget, purchase budget, Cash Receipts from Debtors and Cash Budget.

Sales Budget:
Particulars	2019	2020	2021
Budgeted Sales Volume (Medicines)	30000	36000	42000
Price per unit	$10.00	$10.00	$10.00
Budgeted Sales Revenue	$300,000	$360,000	$420,000

Purchase Budget:
Particulars	2019	2020	2021	2022
Budgeted Sales Volume	30000	36000	42000	45000
Add: Closing Inventory	10800	12600	13500
	40800	48600	55500
Less: Opening Inventory	9000	10800	12600
Budgeted Purchase Volume	31800	37800	42900
Purchase Price per unit	$4.00	$4.00	$4.00
Budgeted Cost of Purchase	$127,200	$151,200	$171,600

Schedule of Cash Receipts from Debtors:
Particulars	2019	2020	2021	2022
Sales Volume	18000	30000	36000	42000
Selling Price per unit	$10.00	$10.00	$10.00	$10.00
Sales Revenue	$180,000	$300,000	$360,000	$420,000
Less: Cash [email protected] 90%	$162,000	$270,000	$324,000	$378,000
Credit Sales	$18,000	$30,000	$36,000	$42,000
Cash receipt in the following month		$18,000	$30,000	$36,000

Cash Budget:
Particulars	October	November	December
Cash Sales	$270,000	$324,000	$378,000
Receipts from Debtors	$18,000	$30,000	$36,000
Payment to Suppliers	$10,000	$14,000	$19,600
Net Increase/(Decrease) in Cash Flow	$298,000	$368,000	$433,600
Add: Opening Cash Balance	$17,000	$315,000	$683,000
Closing Cash Balance	$315,000	$683,000	$1,116,600

The above table shows different budgets which are prepared by the business and the same are prepared considering the past year estimates and the targets which the management of Anchor Trust wants to achieve. The budgeted sales volume for the product of the business is considered to be 30000 units for the year 2019 and the same is anticipated to increase by 40% over the estimate which is considered for 2019. The cost per unit of the business is considered to be $ 10 per unit and the same is considered to be consistent for all the years. The motive of the management of Anchor trust is not to generate profit but to serve the customers and people. Therefore, the management only wants to cover the fixed costs and variable costs of the business. The purchase budget considers the opening inventory of the stock which is present with the business and the closing inventory which the management anticipates would be available to the business. The management also sell products on credit basis and thereby the credit sales budget is prepared by the business as shown in the above figure. The management also has prepared a cash budget which effectively shows the anticipation of the business regarding the cash which can be generated by the business. The cash which can be generated by the management for the year 2019 is shown to be $ 315,000 and the estimate as shown in the table above is increasing.

Reference

Al Karim, R. and Alam, T., 2013. An evaluation of financial performance of private commercial banks in Bangladesh: Ratio analysis. Journal of Business Studies Quarterly, 5(2), p.65.

Almaree, K.E.M.P., Bowman, A., Berenice, B.L.O.M., Visser, C., Bergoer, D., Fullard, D., Moses, G., Brown, S.L., Bornman, J. and Bruwer, J.P., 2015. The usefulness of cash budgets in micro, very small and small retail enterprises operating in the Cape Metropolis. Expert Journal of Business and Management, 3(1).

Anchor.org.uk. (2018). Annual report | Anchor. [online] Available at: https://www.anchor.org.uk/anchor-and-you/annual-report [Accessed 21 Dec. 2018].

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Demski, J., 2013. Managerial uses of accounting information. Springer Science & Business Media.

Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: the financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Jones, R., Lande, E., Lüder, K. and Portal, M., 2013. A comparison of budgeting and accounting reforms in the national governments of France, Germany, the UK and the US. Financial Accountability & Management, 29(4), pp.419-441.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Kaspina, R.G., Khapugina, L.S. and Zakirov, E.A., 2014. Employment of activity-based costing in the process of company business model generation. Life science journal, 11(8), pp.356-359.

Matherly, M. and Burney, L.L., 2013. Active learning activities to revitalize managerial accounting principles. Issues in Accounting Education, 28(3), pp.653-680.

Miller, P. and Power, M., 2013. Accounting, organizing, and economizing: Connecting accounting research and organization theory. The Academy of Management Annals, 7(1), pp.557-605.

Nirajini, A. and Priya, K.B., 2013. Impact of capital structure on financial performance of the listed trading companies in Sri Lanka. International Journal of Scientific and Research Publications, 3(5), pp.1-9.

Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2014. Managerial accounting for managers. New York: McGraw-Hill/Irwin.

Omar, N., Koya, R.K., Sanusi, Z.M. and Shafie, N.A., 2014. Financial statement fraud: A case examination using Beneish Model and ratio analysis. International Journal of Trade, Economics and Finance, 5(2), p.184.

Ongore, V.O. and Kusa, G.B., 2013. Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), pp.237-252.

Pervan, I. and Kuvek, T., 2013. The relative importance of financial ratios and nonfinancial variables in predicting of insolvency. Croatian Operational research review, 4(1), pp.187-197.

Rahim, F.A., Muzaffar, S.A., Yusoff, N.M., Zainon, N. and Wang, C., 2014. Sustainable construction through life cycle costing. Journal of building performance, 5(1).

Reineking, C., Chamberlain, D.H., Rudolph, H.R. and Smith, L.M., 2013. An examination of inventory costing convergence under generally accepted accounting principles and International Financial Reporting Standards. Journal of International Business Research, 12(2), p.17.

Schaltegger, S. and Zvezdov, D., 2015. Expanding material flow cost accounting. Framework, review and potentials. Journal of Cleaner Production, 108, pp.1333-1341.