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Estimating costs

Estimating costs. An introduction to costing studies FETP India. Competency to be gained from this lecture. Understand the principles of costing studies. Key areas. Types of costs Annualization Ps and Qs. Usefulness of costing studies. Option appraisal Budgeting

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Estimating costs

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  1. Estimating costs An introduction to costing studies FETP India

  2. Competency to be gained from this lecture Understand the principles of costing studies

  3. Key areas • Types of costs • Annualization • Ps and Qs

  4. Usefulness of costing studies • Option appraisal • Budgeting • Cost effectiveness analysis Types of costs

  5. Cost The value of resources used to produce a good or service Types of costs

  6. Financial costs • Actual expenditure on goods and services • Reflect how much money has been spent • Used to prepare budgets Types of costs

  7. Economic / Opportunity costs • Estimates resources not used for alternative uses • Includes resources for which no money was spent • Volunteer time • Donated equipment and supplies • Use of resources from another programme • Used to: • Conduct a cost effectiveness study • Assess sustainability Types of costs

  8. Prices • Determined by the market • Offer • Demand • May be higher than the value • Monopolies • Taxes • May be lower than the value • Dumping • Subsidies Types of costs

  9. Traded goods • Available on the international market • International market price • Value for importing countries • Foreign exchange used to purchase • Value for exporting countries • Foreign exchange that could be generated through sale • Value = International market price adjusted for • Free on board (FOB) • Cost, insurance and freight (CIF) Types of costs

  10. Non-traded goods • Building • Labour • Scarce • Non scarce Types of costs

  11. Capital and recurrent costs • Capital costs • Items lasting longer than one year • Purchased every few years • e.g., vehicles, buildings • Recurrent costs • Items used up during a year • Purchased regularly • e.g., training, electricity, salaries Annualization

  12. Annualization of capital cost • Capital costs need to be combined with recurrent costs • Costs are easier to manage on a yearly basis • Spread value of capital items over their expected life so that they can be Annualization

  13. Annualization of financial capital cost • Straight-line depreciation • Replacement costs divided by its estimated number of years of life Annualization

  14. Average annual financial cost: Methods • Identify the capital cost items • Estimate the current value of each item • Estimate the number of years of useful life • Divide the current value by the number of years of useful life Annualization

  15. Annualization of capital economic cost • Take into account the value of alternative opportunities for resources tied up in capital • Need of a discount rate Annualization

  16. Average annual economic cost: Methods (1) • Identify the capital cost items • Estimate the current value of each item • Estimate the number of years of useful life which the item can realistically be • expected to have (from the time of purchase). • Obtain the discount rate used • Economic planning office • Ministry of finance • Rate of interest minus the inflation rate Annualization

  17. Average annual economic cost: Methods (2) • Calculate annualization factor from the following formula: ((1+r) t – 1) / r(1 + r)t • Where: • r is the discount rate • t is the number of years after year 0. • Calculate the annual cost by dividing the current value of the item by the annualization factor Annualization

  18. Perspectives • Reflects the kind of costs considered • Example of perspectives: • Cost of interest to the Ministry of health • Cost of interest to the health care system • Cost of interest to the society (include all) • Distributional effects Ps and Qs

  19. Incremental versus average • Average (full) approach • Cost of all resources invested in a programme • Incremental (marginal) approach • Cost of an addition to an existing programme Ps and Qs

  20. Prospective and retrospective costing studies • Prospective studies • Estimate projected costs of a future intervention • Are subject to uncertainty • Require explanations of assumptions • Need sensitivity analysis • Retrospective studies • Estimate costs of an ongoing intervention • Generate consistent and reliable estimates Ps and Qs

  21. Generic cost inventory for a public health programme, by input categories Ps and Qs

  22. Levels to consider for each input category • Intervention activity levels • Organizational levels • Start up and maintenance Ps and Qs

  23. (1) Intervention activity levels • Administration • Planning • Supervision • Evaluation Ps and Qs

  24. (2) Organizational levels • National • Provincial • District • Health care facility Ps and Qs

  25. (3) Start up and maintenance • Start up • Cost of getting the intervention started • Can be capital or recurrent costs • Incurred between the decision to implement and the delivery of the intervention to the first beneficiary • Must be annualized and spread over the programme period • Maintenance / post-start up • Cost of maintaining the intervention Ps and Qs

  26. p x q • p • Unit cost • q • Quantity needed Ps and Qs

  27. Fixed and variable costs • Fixed costs • Constant regardless of the volume of activity • Variable costs • Respond in proportion of the volume of activity Ps and Qs

  28. Intervention units • Express the results of the costing estimates according to the beneficiary • Example • Cost per capita • Cost per child fully vaccinated Ps and Qs

  29. Discounting • Reflects time preference • Better to benefit now and pay later • Valid even in the absence of inflation • Economic costs incurred in the future are discounted • 3% discount rate • $103 spent next year is equivalent to $100 now Ps and Qs

  30. Take home messages • Differentiate financial from economic costs • Annualize capital costs • Quantify needs and estimate unit costs

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