Public Sector Governance and Accountability Series: Budgeting and ...

Activity-Based Cost Management in the Public Sector 207
view for each functional manager. They have become the typical way in
which functional managers think about what level of spending can satisfy
the needs of people relying on them for good service. Most managers are
reasonably confident in the reported numbers underlying this view. They
roughly know their employee salaries and benefits, have authorized most of
the purchasing requests, and understand (but may despise) the allocation
for support costs that they are internally charged with. That is, the managers
understand the bookkeeping system, including its archaic cost-chargeback
schemes. Figure 7.1 illustrates the limited view that many managers have of
their fiscal condition.
The traditional accounting structure mirrors the hierarchical organizational
structure. Each function is a cost center of sorts, and the accountants
consolidate the functional expenses into totals with elegant rollup procedures.
But is managing a cost structure all about focusing on the supply side of
resources, which is basically the organization’s capacity to serve? Or should
the focus begin with reacting to the demands for work placed on the organization
from service recipients and customers? ABC/M brings visibility and
understanding to the service view—fulfilling the needs of the service
recipients and customers who consume the organizational outputs. It
focuses on the demand side for resources.
Inputs
Appropriations and
approved budget
spending levels
Resources
These are known.
The cost of
processes and
work activities
The unit costs of
each output of work
These are usually
unknown
(or greatly distorted
by unfair cost
allocations).
Customers and
service recipients
Source: Author’s representation.
FIGURE 7.1 The Primary View of Most Managers