The Rise of Cost Accounting
Governments are finally beginning to figure out how to develop solid figures for the cost of the services they provide.
Not so long ago, we were sitting around an enormous conference table with senior managers and the governor of a medium-sized Midwestern state. The conversation focused on the state's management, and the governor seemed acutely familiar with the topic. When we brought up "cost accounting," the practice of calculating the expense of individual programs, activities or even units of service such as issuing a single driver's license, the governor made an astonishing statement: "I'm not quite sure what you mean by cost accounting."
It's not that his lack of familiarity was surprising. The startling thing was that he admitted it. Few politicians readily concede ignorance about management topics.
Now, here's our prediction: Within five or six years, there won't be a sophisticated government official or manager around who isn't actually using the useful data derived by cost accounting (also known as activity-based costing).
Government managers' approach to cost accounting is on the same kind of learning curve as with other elements of managing for results. Mark Abrahams, a consultant who is now working on an activity-based-costing effort with the Milwaukee Metropolitan Sewer District, reinforced our prognostication. "I've seen a change in the last year," he says. Not only are more governments trying to figure out how to develop solid cost figures for the services they provide, Abrahams also reports that most states and cities have the capacity to do this, if they want to.
Those words, "if they want to," are pretty important here. Until recently and with notable exceptions, including Indianapolis, Dallas, Austin, Utah, New Jersey and Montana, cost accounting was the last item on most managers' wish lists. In fact, detailed cost-related figures are in short supply from Baltimore to Long Beach, from Maine to Idaho. It's hardly even fair to describe any individual states or cities as laggards, given the fact that the majority of entities are at the starting point, at best, in their use of this practice.
Don't misunderstand. This isn't easy stuff. Figuring out how much it costs to deliver a single unit of service requires a real understanding of exactly how services are delivered and who is involved. Let's say you want to figure out how much it costs to plow one street after a heavy snowstorm. There's nobody in your city who does that job full-time, so you have to figure out exactly how much of a sanitation worker's time was spent in this particular task, at what cost. How much does it cost for upkeep and storage of the snow plows? How much gas do they use? How fast are they depreciating? Then you have to figure out all the indirect costs, such as computer time, managerial overhead and some portion (how much? that's tricky, too) of the sanitation department's space in city hall. Government budgeting makes things harder. Let's say you bought a large stock of sand and salt for the streets in 1999, but the winter was warm and a large supply was left over. So in 2000, your budget won't show any costs for sand and salt. But that doesn't mean the stuff came free.
Things are a little easier--and cost accounting is more frequently used--in "enterprise funds," which run more like businesses. These include things such as water facilities or convention centers.
Our notion that the heightened use of cost accounting is inevitable locality-wide is based on three factors. The first is that information technology is being upgraded in many places, making it far easier to track all the costs associated with a single activity. Second, in city after city, state after state, we've been told about pilot programs and beginning efforts. A few years ago, Washington, D.C., broke down the cost of cutting individual checks. Now, it is seeking a consultant in activity-based-costing management to work with the city in this area.
The final factor is simply that the benefits of cost accounting are clear and abundant. Utah, for example, figured out that it costs $68 a day to house inmates in state facilities, compared with $42 a day in county facilities. Knowing this, the state is trying to keep its own capital development program down and doing more contracting with the counties. This is one reason that the state was able to stabilize the rate of growth in corrections costs in fiscal years 1998 and 1999.
Dallas has been a leader in the use of cost accounting in areas where it charges fees for services or considers outsourcing. "Anytime we're going to contract or outsource something, we'd have the potential of being the bidder ourselves," says Dave Cook, director of budget and management services. "We wouldn't want to blindly go out and contract without knowing what our own costs are."
That makes sense. The simple logic behind the idea that governments should know how much it really costs them to provide services is overwhelming. And since we believe that government managers are, on the whole, a rather bright lot, it would appear to be inevitable that they'll demand--and get--this information.
Join the Discussion
After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.
States Trying to Tax E-Cigarettes2 days ago
Are Californians Getting Over Their Vaccination Fears?2 days ago
In Effort to Gain Notice, Cities Build Increasingly Strange-Looking Buildings2 days ago
Chris Christie Got a Lot of Presents as Governor2 days ago
The Week in Public Finance: Puerto Rico Update, a Comeback for Cities and Calls for Transparency2 days ago
In Annual Address, Gov. Markell Highlights Education and Drug Addiction2 days ago