Academic journal article Bulletin of the World Health Organization

Estimating Costs of Programme Services and Products Using Information Provided in Standard Financial Statements

Academic journal article Bulletin of the World Health Organization

Estimating Costs of Programme Services and Products Using Information Provided in Standard Financial Statements

Article excerpt


The underlying reason for costing programme services and products is to evaluate them, possibly leading to improvements in their efficiency. In general, evaluation of health care programmes involves assessment of programmatic accomplishment, i.e. the extent to which programme objectives have been met. For example, in cataract surgery programmes this may entail estimating the surgical rate in a target population, estimating the prevalence of cataract impairment, or investigating the sight restoration outcomes achieved. It is less common to address the resources consumed and their cost in the course of producing programme outputs. Nevertheless, as recognition of the importance of financial viability increases, particularly for those programmes undertaken by nongovernment organizations, cost (as well as effectiveness) is becoming more central in evaluation efforts. Financial viability is aided by understanding where costs lie and, thus, where cost reductions are possible.

This article is concerned with financial indices: operating costs (expenses), investment (assets), and long-term financial viability (revenue amounts and sources). We describe the use of standard financial reports -- the balance sheet and the income statement -- to obtain the necessary information and provide a comparative analysis of the cost of cataract surgery in two facilities in Nepal. Uniformity in cost accounting is particularly important in making comparisons between programmes. By advocating the use of standard financial reports and offering guidelines for the valuation of contributed resources, both accounting uniformity and completeness are addressed.

Methods and results

Cost determination

The performance of a programme is influenced by the specific structural and operational elements used to produce programmatic outputs (1). These elements determine the cost, as well as the quantity and quality of output (2). Although ultimately it may be of interest to compare programmes and facilities structurally and operationally, we propose cost comparisons since their use is more straightforward.

Cost comparisons can be focused on the average cost of producing a unit of output (total cost averaged over the entire programme output) or the cost of producing the last unit of output, i.e. the marginal cost. Fixed costs, such as those for equipment and labour, which do not vary with normal fluctuations in production levels, are part of the average cost calculation, but are not part of the marginal cost (marginal cost includes only variable costs). Our interest is in determining the total costs of a programme as the basis for calculating average unit cost.

Cost determination is complex. Care must be taken to ensure that accounting is complete, i.e. that no costs are overlooked, and caution must be exercised so that the costs of resources used for more than one programme or "product line" are fairly allocated if product line costing is of interest; a rational basis for allocation of shared resource costs must be established. Donated or in-kind resources represent another costing issue; these resources must be priced so that their value as programme inputs is accurately and realistically reflected.

The costing exercise could proceed in a bottom-up fashion, which requires that each operational element or component of the production process be delineated and all resources utilized "costed out." Unless the process description is complete, including indirect supporting resources, this "micro" approach is likely to result in an incomplete cost picture. It may be feasible for determining marginal costs, but it is likely to be deficient when total costs are of interest.

A realistic alternative is to approach programme costing from the top down. Standard financial statements provide the starting point for this approach. These reports are audited by external accountants to provide assurance that they are free of misstatements and that customary accounting principles are used. …

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