With the publication of the 2014 report “Estimating the cost of accidents and ill-health at work: A review of methodologies” by the European Agency for Safety and Health at Work, there has been renewed interest in the effects of occupational accidents on company finances. But what is the bottom line effect of occupational accidents and why is it so difficult to measure?
In management accounting we talk about direct and indirect costs. Direct costs are costs that can be traced directly to a cost object (i.e. something we want to know the cost of) but indirect costs cannot be traced directly to a cost object. The ability of managers to discern between direct and indirect costs is dependent on the design of the accounting system where the focus is usually on tracing uses of hours and materials to the products and services, which the company trades.
If occupational accidents are seen as cost objects, managers cannot see how much they cost because most of the costs associated with occupational accidents are indirect costs. That is to say they can not be traced directly to occupational accidents because accounting systems are not set up to trace costs directly to occupational accidents. Nor should they. But this means that managers are often flying blind when it comes to the true cost of occupational accidents.
In a project involving nine companies in Denmark some years ago we developed a method for calculating the total costs of occupational accidents. This method – which we called the Systematic Accident Cost Analysis (SACA) method – is based on well-known management accounting method called Activity Based Costing. It focuses on identifying the activities that either emerge or are affected by the occupational accident. It then measures the use of resources and costs of these activities to get the total cost of the accident.
In the companies we analyzed with this method we found six types of costs associated with the consequences of occupational accidents.
- Costs due to the absence of the injured employee: Includes e.g. payment of sick pay and payment of supplementary sick pay.
- Communication costs: Includes e.g. formal communication to employees, staff, and general management as well as informal communication between employees.
- Administration costs: Includes payroll administration, administration regarding health and safety regulations and reporting requirements, follow-up activities and meetings.
- Costs of prevention initiatives: Includes e.g. purchase of machine components and training initiatives.
- Operation disturbance costs: Includes e.g. training of replacements, revenue loss, co-workers overtime, and production reductions.
- Other costs: Includes costs such as e.g. fines and gifts to injured employee.
The main conclusions were quite interesting and included:
- Indirect (i.e. hidden) costs of occupational accidents could vary from 2% – 98% depending on accident characteristics and the activities incurred as a consequence of the accident.
- Calculating occupational accident costs can illustrate and visualize the value created by the Occupational Health and Safety (OHS) department by preventing accidents and thus avoiding costs.
- Accident costs vary between companies and depend on accident type, wage structures and policies, OHS management system scope, and production process vulnerability.
- Smaller companies had on the average higher accident costs per accident than larger companies.
Preventing occupational accidents makes sense from a moral and legal perspective. But the project showed that prevention also makes sense from a company financial perspective. Lets say a mid sized production company has 5 occupational accidents a year showing a direct cost of 30.000 Euro on average per accident in the accounting system in sick pay and compensation. A SACA analysis showed that only 30% of the occupational costs are direct and thus visible in the accounting system. The total annual cost of occupational accidents is thus 500.000 Euro. This company in its most recent annual report disclosed a profit margin of 10% – i.e. how much of the revenue was left when all costs have been subtracted. This means that the company would have to sell for 5.000.000 Euros to generate enough profit to cover the costs of occupational accidents. In other words, if the accidents had been avoided, 5.000.000 Euros on the top line would have counted towards increasing the bottom line and the value increase of the company.
The SACA report (in Danish) is available by sending an e-mail to pallrik(at)ru.is and an English description of the method is available in this article.