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

Activity-Based Cost Management in the Public Sector 225
agencies are facing budget cuts (or taking on additional activities owing to
consolidation) and are unclear about the costs of their internal outputs.
What does it cost to process a new registrant versus a renewal? Why might
these two costs be so different? Do both costs per event seem too high?
Budgeting. ABC/M helps managers routinely plan for future spending on
the basis not of the current rate of spending but, more logically, of the
demand volume and mix of services anticipated.
Aligning activities to the strategic plan. ABC/M corrects for substantial
disconnects between the work and service levels that an organization is
supplying and the activities required to meet the leadership’s strategic
goals. It can be shocking for organizations to discover that they are very,
very good at things they do that are deemed very, very unimportant to the
strategic plan.
Managerial accounting data have many uses. The idea is not to start an
ABC/M implementation process just because it feels right or because an
authority commands or dictates it. The idea is to know in advance what
problems the better data will solve.
Multiple Views of Costs Are Empowering
When senior leaders, managers, and employee teams are provided reliable
views of not only their resource spending but also the costs of their work
activities, the costs of processes involved in these activities, and the total and
unit costs of the various outputs deriving from the activities, they have a
much better basis for making decisions. Compare all that with what they
have today. They have the spending view, but no insight as to how much of
that spending is or was really needed or why. Managers need to know the
causal relationships. When employees have reliable and relevant information,
managers can manage less and lead more.
An ABC/M system provides a good starting point for any nonprofit or
government organization to model its cost behavior. It is a solution looking
for problems—and all organizations have problems. ABC/M provides a topdown
look at how an organization’s resources get used, why, by whom, and
how much.
Divide resource spending into two categories: resources used and
resources unused (that is, idle capacity). For the first category, a cost can be
incurred only if some person or piece of equipment does something. In
other words, to understand cost behavior, one must understand which
activities the organization performs, which other work activities or services