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

Products or citizens
Activity-Based Cost Management in the Public Sector 213
From general ledger
Actual
Salaries US$621,400
Equipment 161,200
Travel expenses 58,000
Supplies
43,900
Use and
occupancy 30,000
Chart-of-accounts view
License Processing Department
Plan
US$600,000
150,000
60,000
40,000
30,000
Favorable/
(unfavorable)
US$(21,400)
(11,200)
2,000
(3,900)
––
To ABC database
Activity-based view
License Processing Dept.
Key or scan licenses US$31,500
Analyze licenses
121,000
Suspend licenses
32,500
Receive licensee inquiries 101,500
Resolve member problems 83,400
Process batches
45,000
Determine eligibility
119,000
Make copies
145,500
Write correspondence 77,100
Attend training
158,000
Activity
cost
drivers
# of
# of
# of
# of
# of
# of
# of
# of
# of
# of
Total
US$914,500
US$880,000
US$(34,500)
Total
US$914,500
US$914,500
Source: Author’s representation.
Note: In addition to showing the content of work, the activity-based view gives insights into what drives each
activity’s cost magnitude to fluctuate. When managers see a report with the chart-of-accounts view, they are
either happy or sad, but they are rarely any smarter!
FIGURE 7.3 The Language of ABC/M
If one asks managers who routinely receive this report, “How much of
these expenses can you control or influence? How much insight do you get
from this report into the content of your employees’ work?” they will likely
answer both questions with “Not much!” This is because salaries and fringe
benefits usually make up the most sizable portion of controllable costs, and
all that the manager sees are those expenses reported as lump-sum amounts.
Translating the chart-of-account expenses shown under the generalledger
or fund-accounting system into the actual work activities that consume
those expenses begins to increase a manager’s insights. The right side
of figure 7.3 is the ABC/M view that is used for analysis and as the starting
point for calculating costs both for processes and for diverse outputs such as
services. In effect, the ABC/M view begins to resolve the deficiencies of traditional
financial accounting by focusing on work activities. ABC/M is very
work-centric, whereas general-ledger and fund-accounting systems are
transaction-centric.
Another key difference lies in the language used to depict cost allocations
(that is, absorption costing). ABC/M describes activities using an
“action verb–adjective–noun” grammar convention, such as “process building
permits” or “open new taxpayer accounts.” This language gives ABC/M
its flexibility. Such wording is powerful because managers and employee
teams can better relate to these phrases, and the wording implies that the
work activities can be favorably affected through change, improvement, or