Activity Based Costing in the Public Sector

By: Brandy Medina

Public sector organizations at all levels and of all types are facing intense pressure to do more with less. Governments at all levels in almost all the countries in the world are feeling some kind of pressure. The pressure on spending comes from many sources, i.e. from politicians aiming to win taxpayers’ approval. There is pressure from the competition with other cities to attract homebuyers or with other counties, states or nations to attract businesses. In the United States, the cities don’t just compete against other cities – each city competes against its own suburbs, and the suburbs often have an advantage in attracting residents and businesses. They may offer lower taxes, better schools and less crime. As residents and businesses relocate, the cities and towns they departed from lose a little more of their tax base. Less money is available unless tax rates are raised. Additional pressure may come from declining demand, regardless of the reasons. An example is rural road maintenance. In these cases, economies of scale are less easily achieved, and the final costs become more expensive. In the United States, the federal government is shifting some responsibilities to state and local governments but providing only limited funding to fulfill those obligations. Regardless of where the pressure is coming from, the message is: better, faster, cheaper – hold the line on taxes, but don’t let service slip. Meeting this daunting challenge often requires governments to:

* Determine the true and actual costs of services. * Implement process improvements. * Evaluate outsourcing or privatization options (i.e., is it better to deliver internally or purchase from external organizations?) . * Align activities to the organization’s mission and its strategic plan.

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