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

Activity-Based Cost Management in the Public Sector 231
getting too detailed beyond incremental benefits—will compute the most
reasonable final-final cost-object costs.
ABC/M Model Analysis
Continuing with this highway maintenance and roadbed example, table 7A.1
illustrates fictitious costs that compare the unit cost of the output of work for
each type of road’s cost per mile. This type of report is very popular with
ABC/M users. It not only provides the total unit costs of the output—now
validly computed—but also subdivides that same total unit cost among the
various work activities that are being consumed.
This deeper visibility of activity costs within a unit of output provides a
form of internal benchmarking. It allows the employee teams and managers
to ask much better and more focused questions. For example, why does this
cost so much more than that? This is particularly relevant for large costs. Note
that ABC/M does not automatically conclude that one observation is good
and another is bad. ABC/M simply provides opportunities to ask much better
questions. In this way, it becomes an excellent focusing tool for highlighting
where to look for potential changes for improvement.
However, when the same information revealed in table 7A.1 is combined
with ABC/M’s powerful attributes, ABC/M becomes more suggestive
about what to change. For example, if a relatively high cost per unit of work
activity was also scored as a postponable or discretionary cost, rather than
as a critical one, then employees could consider scaling back on their workload
for that activity. At a minimum, employees could intelligently discuss
what underlying factors are leading to the large relative costs compared with
the other final cost objects. In this way the final cost-object module of the
ABC/M cost-assignment network provides insights that stimulate teams to
think and to discuss how their limited resources are being used and may be
better used.
ABC/M versus Process Flowchart Analysis
The key message is that when employee teams and managers understand
how the diversity and variation of their cost objects cause the levels of their
cost structure, they can better consider ideas to change things. The quality
management community occasionally proclaims that “variation is the
enemy,” because variation can lead to higher costs of nonconformance. But
some variation is market generated, so diversity must be accepted—as must
the indirect costs that come with it.