Costing government outputs: an assessment of activity based costing

Costing government outputs: an assessment of activity based costing

This research investigates the application of activity-based costing (ABC) practices for achieving an outcomes based performance management (OBPM) in an Australian State Government. The extent to which this approach is adopted and applied by the case study agency is examined. A mixed-method research approach was used, incorporating document analysis and case study interviews, to assess the effectiveness of implementation of ABC in the agency. Concerns are raised about the degree to which ABC is adequate, in the current state of implementation, for enabling the agency to know whether or not it is measuring the true costs of the outputs that contribute to the long term outcomes desired by the Government. Traditionally, public sector managers have not been concerned with issues such as costing of services because data of this type was rarely requested. The traditional public sector financial management platform gave a vertical view of each agency: a view that focused on departmental blocks of expenditure. This meant that agencies reported only on the resources consumed by work units within the agency. For accountability purposes, managers were held responsible for deviations between actual and budgeted expenditure. The gathering of costing data was rarely considered as was the idea of demonstrating an agency's contribution to the achievement of cost effectiveness and/or cost efficiency of its services (Foltin, 1999: p 45). It is said that 'necessity is the mother of invention' and there is a sense of urgency by government in placing a much greater emphasis on holding managers accountable for both the efficiency and effectiveness by which they achieve their program objectives. Indeed, the emphasis is to gather performance data, including costs, about the services delivered by agencies in order to better inform resource allocation decisions. This is the essence of outcomes based performance management (OBPM). The OBPM process is best described as a comprehensive and integrative planning, budgeting and performance management approach that identifies the outcomes that the Government desires for its communities and citizens; sets strategic direction and objectives; and decides on appropriate delivery options that support expected performance (Treasury Department, 1998: p 5). The key ingredients of an OBPM framework are the relationships of the costs of government programs to resources, and the achievement of an approved plan (Pitsvada & LoStracco, 2002). The application of activity based costing (ABC) is a critical success factor in meeting these requirements (Cunningham & Harris, 2000). The aim of this research is to investigate the application of ABC in an Australian State Government for calculating the cost of products and services delivered by agencies and for assessing the efficiency and effectiveness in delivery of these services. Given that ABC is the recommended costing approach for such purposes within the State public sector, the extent to which this approach is adopted and applied by the case study agency is examined. The aim of this research is to understand whether there is a difference between ABC-in-use and intended-ABC. Literature in this area has tended to fall into a number of categories:(i) identification, measurement and analyses of costs associated with producing products or services (Greasley, 2001); (ii) the comparisons of the traditional costing approaches and contemporary ABC method (Kaplan, 1985); and, (iii) the potential benefits and possible reasons for failure of ABC implementations (Pierce & Brown, 2006). Much of the research surrounding costing methodologies, particularly ABC, has been conducted in the private sector and primarily in the manufacturing industry (Cooper & Kaplan, 1987). While there are a number of studies conducted in the services sector (Goddard & Ooi, 1998) there is a limited number that examine costing approaches within a public sector environment. These studies are of importance to this research because they provide detail of the models that may be appropriate for calculating the cost of products and services delivered by public sector agencies. Furthermore, they contribute to an enhanced understanding of how costing data may assist agencies in assessing the efficiency and effectiveness of their service delivery.

© 2015 JAABC. No part of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, including photocopying and recording, or by any information storage and retrieval system, without the written permission of the publisher. Paper originally presented at the The Economics, Finance, MIS and International Business Research Conference, 10-13 Jul 2014, London, U.K. Access restricted at request of lead author.