How to understand and calculate costs

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How to understand and calculate costs

Any NDIS funded client you service will receive individualised funding. Therefore, it’s vital for you to have a solid plan in place to calculate the real cost of delivering your services. This will help you to price services to ensure the long-term sustainability of your organisation.

Costing and pricing are separate activities, but they are closely related within the context of the NDIS as the Agency will determine price guides for service categories.

It may take you time to move to a mature model of costing and pricing of services, and some elements may require additional resources. Investing in these resources will help you to identify the differences between your costs of service delivery and the prices you receive. The reality is that you must recover all your costs or risk insolvency.

NDS and the Curtin University not-for-profit Initiative have developed a costing and pricing practical learning program aimed at increasing costing and pricing skills for disability service providers across Australia. The program builds knowledge and skills in costing and pricing for financial, operational and service delivery staff. The learning materials are available in a number of formats to support different learning styles and levels of skill.

 

As it is the responsibility and prerogative of organisations to manage their finances as they choose, each organisation needs to decide on the most appropriate costing method to suit their circumstances. Organisations are encouraged to obtain external advice if necessary, in reaching that decision.

How to calculate single service costs

If your organisation only delivers a single service, the exercise of calculating unit costs is a relatively simple task.

The formula is Unit Cost ($) = Total annual costs ($) divided by the Total annual volume (UOM).

In this method, the direct and indirect costs can be separated and allocated by simply dividing them by the number of units delivered.

This can be a useful model for internal costings, to calculate the costs for different business units or to produce a simple baseline for your organisation.

Build up key cost elements

For most organisations, the transition to the NDIS environment will require the ability to cost individual services. This is because you will only be able to generate revenue based on the services described in the NDIS Price Guide.

By working out the costs of each individual service, you can make strategic decisions on your various services - if they’re viable, if you need to seek alternate funding, or if some services will need to be cross-subsidised. Cross-subsidisation is the practice of charging higher prices to one type of customer to artificially lower prices for another group.

Review your current chart of accounts to decide if it provides the flexibility and detail, you will require to allocate and assign costs to individual services. The National Standard Chart of Accounts NSCOA, developed by the Queensland University of Technology, provides a common approach to recording and reporting accounting information (consistency in accounting categories and terms).

Allocate or assign costs based on each activity. Indirect costs are commonly allocated based on agreed formulas and process. Direct costs can be attributed to specific activities.

Much of the risk involved in costing and pricing is tied to the estimation of cost and unit of measure volume, so make sure you do these costings carefully.  

Understand relevant range

Increases or decreases in activity levels or the units of measure delivered are usually consistent within a range. If activity increases beyond a certain point above or below that range, you may need to employ more staff, rent a bigger space or add additional transport. You will, therefore, incur an increase in both fixed and variable costs.

Decide on what services you will provide and in what volume, to allow you to define a relevant range for your organisation.

Once you have identified individual activities involved in your service delivery, you may be able to bundle activities that are delivered together. It can be more efficient to cost bundles if each bundle is the same and each person receives the same package of activities or services.

Estimate activity levels

A review of historical data of activity levels from the past three years should be sufficient to estimate activity levels. However, if that is not reflective of current services, you may need to go further back. This exercise may also provide valuable insights into what has prevented your organisation from reaching its potential activity levels or capacity.

Identify other market factors that may reduce or increase activity - for example, increased competition or participants leaving the market. Also factor in internal factors such as maintenance or difficulty recruiting staff.

Apply a reasonable test to estimate activity levels. Are estimates like those experienced in previous years? Again, this is not an estimate of capacity but of likely actual activity.

Capture your overheads

As with many service organisations, the bulk of ‘overhead’ costs are in the people, property and vehicle categories. Other costs may be grouped together and allocated or assigned based on your organisation’s accounting practices.

Develop clear and effective reporting

A comprehensive costing framework will provide you with the ability to report costs by service and report on statistics on an exception basis. You can also highlight individual results of services when elements of the budget need to be reported to your Board.

Resources

The National Standard Chart of Accounts (NSCOA) is a free data entry tool and data dictionary for charities and other not-for-profit organisations. All Australian governments (Commonwealth, state and territory) have agreed to accept NSCOA when requesting information from not-for-profits.

https://www.acnc.gov.au/tools/topic-guides/nscoa

A national costing and pricing framework for disability services. 

http://businesslaw.curtin.edu.au/wp-content/uploads/sites/5/2015/09/national-costing-pricing-framework-for-disability-services-Oct-2014.pdf

User manual for the NDS / Curtin costing and pricing tool version 4.0 (July 2017). 

https://www.cplp.nds.org.au/tools?view=document&id=34:nds-curtin-costing-pricing-tool-manuel&catid=19:tools

Analysing time: A guide to understanding key elements of the workforce under the NDIS

https://www.nds.org.au/images/resources/Report_WorkforceCosts-2017.pdf

NDS/Curtin costing and pricing tool 

https://www.cplp.nds.org.au/tools?view=document&id=35:nds-curtin-costing-pricing-tool&catid=19:tools

Costing and pricing learning program 

https://www.cplp.nds.org.au/learning-program