Ten Cost Pools Commonly Utilised to Calculate the Financial Cost of Accidents

Annually thousands of work related accidents cause an enormous amount of pain and suffering to workers and their families. In order for a company to have an effect on this and make shareholders understand their responsibility, legislation alone would not motivate them to reduce this pain and suffering. For this reason it is important to also be able to quantify the losses to the company.

In order to understand the ten most commonly used cost pools utilised to calculate the financial cost of accidents it would be necessary to explain each off these cost pools and indicate their individual and unique contribution towards the cost of the accident. These cost pools and be utilized to analyse occupational accident and determine the financial cost of these accidents to the company.

It is important to make a distinction between financial and non-financial costs associated with accidents. This article focuses on the financial cost of accidents. It does not however imply that the non financial factors are of any less importance.

Ten elements that have been isolated in practice that make up the cost of work related accidents to employers are as follows:

1. Compensation Paid to the Injured

The compensation paid to injured workers is clearly a cost that will be carried by the company. In some cases this cost is covered by insurance, however, the insurance premiums are directly linked to the number of accidents and associated claims form the workers of the individual company. This factor should therefore be included in any calculation to determine the financial cost of accidents.

2. Loss of Production

It is a proven fact that with every accident, how small it may be there is an associated loss of production. This loss of production impacts directly on the financial well being of the company and should be accurately measured to be able to determine the financial cost of accidents.

3. Penalties Due to Delay in Production

In the modern world of international business companies negotiate contract to secure lucrative contracts. These contracts normally have some form of penalty clause included, in the event of late delivery. During accidents, production processes are normally interrupted and then cause a delay in production. Should this delay result in a delayed fulfilment of a contract, the financial impact should be determined and included when determining the cost of accidents.

4. Training and Re-training Cost of Injured Workers

As a result of an accident the injured worker needs to be replaced for the duration of his or her absence from the workplace. In order to ensure that production levels are maintained a replacement worker must be employed. In practice what happens is that all the workers down the chain would expand their activities and an additional worker will be employed at the lower end of the scale. Often the mistake is made to only include the training cost of the lower end worker however all the workers may require some additional training. For this reason the training cost for the replacement worker is taken as the cost of training a new worker up to the level of the injured worker. In addition to the temporary worker having to be trained, the injured worker may also need refresher training on returning from an extended stay of absence. All these costs should be added together to establish this component cost of the accident.

5. Investigation and Enquiry Costs

The cost of conducting investigations and accidents can vary dramatically from situation to situation. In some cases a number of legal advisors and external specialists will be hired to establish the root causes of the accident and to try and prevent any consequential legal action. The important aspect to remember here is that all the investigation costs should be accounted for in the calculation.

6. Medical and Hospitalisation Cost

Inevitably accidents are associated with injury to people. The cost to treat the injuries should be carefully calculated. These costs should include first aid treatment cost at the site, ambulance cost to transport the injured to a medical facility as well as the actual hospitalisation and associated costs. Should the company have an insurance policy to recover these costs, a calculation should be done as the impact that the claim will have on the premiums and no claim bonuses that may have accrued in the event of on accident. In addition to this, cognisance should be taken of the deductibles and self insurance components of the claim.

7. Rehabilitation Cost of Accident Site

By their nature, accidents cause damage to equipment, assets and the environment and this damage needs to be rectified subsequent to accidents. The nature and extent of the damage will depend on the type of accident and the energy sources that resulted in consequences. The failure mode will also affect the collateral damage associated with the accident. During the establishment of the cost associated with the rehabilitation of the accident site short and long term costs should be determined. It may be that the immediate cost would be to clean up a chemical spill associated with the accident however the chemical may enter the ground water and only become known in medium to long term. The cost associated with such an event may run into the millions or even billions.

8. Cost of Fines, Statutory Levies And Penalties

With the advent of the new duty of care type of legislation, companies are much more prone to potential fines, statutory levies and penalties as a result of accidents. Fines, especially those associated with accidents that result in some form of environmental impact is notoriously high and courts have of late been even harsher about imposing such fines. Fines and penalties resulting from accidents that result in the injury or death of workers can also be significant and should be included in the calculation.

9. Additional Administration Cost

One cost, associated with accidents, that is very often not recognised or very often underestimated is the loads of additional administration that is associated with accidents. In a number of companies that has a high frequency of accidents permanent administrative positions have been created to deal with the extra load caused by the accidents. Often these positions and the costs associated with them is not recognised as no company is brave enough to admit that the positions was originally established as a result of the accident rate of the company. Even in companies where the rate of accidents is not that high, the administrative burden is hidden in some other appointment. The burden is even more pronounced in companies that have to report accidents to corporate head offices and government institutions. The time of people conducting these administrative functions should be recorded and the cost should be allocated to the accident just as it would be against any other activity.

10. Loss of tolerance and integrity with the workforce, customers and the community.

The loss of tolerance and integrity with the workforce, customers and the community is a cost that is very difficult to quantify and is included to ensure that the company is aware of the loss. One should recognise that this cost is not imaginary just because it is difficult to quantify, it is as real as any of the other costs mentioned above.

Conclusion

In different companies different cost pools can be utilized to determine the cost of occupational accidents but they will always be similar to the ones discussed above.

In companies where an activity based costing system is used it would be much easier to calculate the cost of accidents as the cost pools discussed above could be integrated easily.

The detail and level of complexity of any costing system should be guided by the potential savings and benefits that the costing system would provide. Care should be taken to ensure that the savings and benefits obtained supersede the cost to determine the accident cost.

In the final analysis a manager should not concentrate on how to calculate product costs but should concentrate more on why the costs were there in the first place.

© Carl Marx