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

218 Gary Cokins
resources they draw on. To understand costing, mentally reverse all the
arrowheads in figure 7.4. This polar switch reveals that all expenses originate
in a demand-pull from customers. The calculated costs simply measure
the effect of that demand-pull. Costs are always a measure of effect; this
is a basic principle in costing.
The bottom portion of figure 7.4 reveals multiple final cost objects—
supplier-related activity outputs, products and services, and citizencustomers.
It displays a nested consumption sequence of final cost objects.
A metaphor for this consumption sequence is the predator food chain, in
which mammals eat plants and large mammals eat small mammals. The
final-final cost object in this figure is the citizen-customer, who ultimately
consumes all the other costs of the final cost object, except for the organizational
sustaining costs.
Organizational sustaining costs are activity costs not incurred by
making products or delivering services to customers. The consumption of
these costs cannot be traced logically to products, standard service lines,
channels, or customers. (They can be allocated arbitrarily but not with
causal relationships.) For example, when the accountants close the books
each month, they can trace the costs of that activity to senior management
as an example of organizational sustaining cost objects. Allocating them to
products, services, or customers is misleading because neither products
nor services nor customers caused these activities; allocating them thus
would overstate those costs, sending the wrong signals to employees who
use product cost information for making decisions.
The direct costing of indirect and shared costs is no longer an insurmountable
problem, given the existence of commercial ABC software
products. ABC allows intermediate direct costing to a local process, an
internal customer, or a required component that is causing the demand for
work. In short, ABC connects customers with the unique resources they
consume—in proportion to their consumption—as if ABC were an optical
fiber network. Visibility of costs is provided everywhere throughout the
cost-assignment network.
One City’s Benefits from ABC/M
Indianapolis, Indiana, was one of the first major cities to embrace ABC/M. In
the mid-1990s, the municipal government joined forces with local business
leaders to apply contemporary business improvement practices. Knowing
what things cost was considered a prerequisite to focusing on what to change.