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© Corporate Renaissance Group1
Using costing of services to improve performance-oriented budgeting
By
Jim McCrindell and Vijay Jog
Using costing of services to improve performance-oriented budgeting
By
Jim McCrindell and Vijay Jog
© Corporate Renaissance Group2
CopyrightCopyright
Corporate Renaissance Groupwww.crgroup.com
613-232-4295All rights reserved.
This document may not, in whole or in part, be copied, photocopied, reproduced, translated, or reduced to any electronic medium or machine-readable form without prior consent in writing from Corporate Renaissance Group. We are grateful for the use of some copyrighted material from our strategic partner - Cost Technology Inc.
© Corporate Renaissance Group3
Let us start with an exampleLet us start with an example
• We have secured funding for a project to improve overall health of children in a designated area by providing health services
• We are interested in ensuring that the funding is making an impact and with right financial controls
© Corporate Renaissance Group4
Management Information Management Information
Health services$500,000
Health services$500,000
• Goal/objective: Improve the health of the local population by reducing incidents of disease
• Budget/spending authority: • $500,000 for wages and material• Measurement/control: money went to
health related service for wages and material
• Report card: money was correctly spentDisease levels hard to quantify
© Corporate Renaissance Group5
We have management informationWe have management information
• It can be audited and reported• Financial control system needs are met
But not sufficient for some important management questions?
What did we get from the $500,000 budget?
© Corporate Renaissance Group6
Resources, activities and outputsResources, activities and outputs
Health services$500,000
Health services$500,000
Immunization$100,000
Immunization$100,000
Resource Drivers time and material
Activity Drivers# of immunizations (5000) Average Unit Cost
$20Average Unit Cost
$20
20 percent of wages and material relates to
the immunization activity
© Corporate Renaissance Group7
Now we have better informationNow we have better information
• how much efforts went in immunization? (Activity)
• what was the cost of the activity “immunization”? (Activity cost)
• How many immunizations were done? (output)• what was the cost per immunization?
(efficiency)• How to use this information for work load
management, linking to objectives, bench marking, decision making?
Qu: can we know more?
© Corporate Renaissance Group8
Resources activities and outputs Resources activities and outputs
Health services$500,000
Health services$500,000
Immunization$100,000
Immunization$100,000
Resource Drivers time and material
Activity Drivers# of immunizations (5000) Average Unit Cost
$20Average Unit Cost
$20
TB$30,000(#3,000)$10 /Unit
Cholera$20,000(1,500)
13.33/unit
Hepatitis$55,000
(#500)($110/unit)
© Corporate Renaissance Group9
Now we have even better informationNow we have even better information
• Know costs at more detailed level which may allow us to redirect efforts
• know that immunization costs depend on the type • may be able to breakdown vaccine costs separate from
process (labor) costs• May better link to specific objectives
Note: still do not know outcome/impact because:A) it could only be known after a while andB) impacted by other outputs (better sanitary systems,
better water, better education, etc.)
© Corporate Renaissance Group10
What more we would like to know?What more we would like to know?
Percentage of children immunized how much time it takes to get immunized (waiting list and
time)Quality of immunization service (?????)
© Corporate Renaissance Group11
“Costs” is only one (but very important) dimension of service performance -
“Costs” is only one (but very important) dimension of service performance -
Value/cost
Service/quality Cycle/turnaround time
Resources
Activities and Operational Environment
© Corporate Renaissance Group13
Service costing is a critical element of performance-oriented budgeting because it allows us to answer key questions …..
Service costing is a critical element of performance-oriented budgeting because it allows us to answer key questions …..
• What does it cost to deliver these services?
• Are we delivering our services cost-effectively?
• How do our service costs compare?
• How much should we charge for these services?
• Is there is an alternative, less costly, way to deliver these services?
© Corporate Renaissance Group14
Hence: Activity-Based Costing (ABC)Hence: Activity-Based Costing (ABC)
The basic assumption of ABC is very simple.
ABC assumes that services create need for outputs which create the demand for activities which, in turn, consume resources.
By tracing costs to services/outputs according to the activities required to provide them, ABC provides a more accurate picture of costs and performance.
© Corporate Renaissance Group15
The ABC Cross
RESOURCES
$ used to do work
RESOURCES
$ used to do work
Objects of Work(or outcomes)
To what, or for whom,work is done
Objects of Work(or outcomes)
To what, or for whom,work is done
Resource Drivers
Activity Drivers
The ProcessView or ABM
Performance MeasuresHow well the work
is done?CostTime
Quality
Performance MeasuresHow well the work
is done?CostTime
Quality
Activities
Work
Activities
Work
Cost Drivers
Why work is done
Cost Drivers
Why work is done
The Cost AssignmentView or ABCFinancial
system
© Corporate Renaissance Group16
Knowledge of Costs enhances accountabilityKnowledge of Costs enhances accountability
CostingCosting of of ServicesServices
© Corporate Renaissance Group17
ABC provides a multi-dimensional cost view of the organization
ABC provides a multi-dimensional cost view of the organization
Organization•Departments•Branches•Divisions•Regions Resources
•Salaries•Supplies•Travel•Depr.•etc.
Activities•Processing claims•Paying pensions•Teaching•Nursing•Maintaining buildings•etc
Activity Costs and Activity Based costs of services
© Corporate Renaissance Group18
xxxxx xxxxx xxxxxxxxxx xxxxx xxxxxxxxxx xxxxx xxxxxxxxxx xxxxx xxxxxxxxxx xxxxx xxxxxxxxxx xxxxx xxxxxxxxxx xxxxx xxxxx
Activities may be part of a “process” transcending departmental boundariesActivities may be part of a “process”
transcending departmental boundaries
HealthDepartment
TaxDepartment Treasury
Payments toEligible Clients
xxxxx
process
activity
Financial Support to Hepatitis Victims
DeterminingMedical Eligibility
DeterminingFinancialEligibility
Reviewingand Paying
© Corporate Renaissance Group19
Multiple usage of service cost informationMultiple usage of service cost information
ServiceCosts
UserFees
Account-ability
Perform-ance
Measures ServiceStandards
CostReduction
Bench-marking Business
PlanningAlternative
ServiceDelivery
© Corporate Renaissance Group20
Dealing with Direct Payments and Transfers
Dealing with Direct Payments and Transfers
• Some government service costs consist mainly of direct payments to persons and organizations, e.g.,
–pensions
–grants and contributions
• Activity costs relate to the cost of administering such services.
• Thus, the total cost of the services provided can be identified along with the efficiency of providing the services (e.g., cost of processing pension payments per dollar of pension payment or per cheque)
© Corporate Renaissance Group21
From concepts to implementation …. From concepts to implementation ….
• Implementing of ABC and ABM requires a different approach to resource allocation, management reporting, financial system design/usage and incentive/promotion systems.
© Corporate Renaissance Group22
Note …. Note ….
• Traditional financial systems are mainly tracking systems - they only tell us how much was spent by line item (salaries, benefits, travel, etc.) and organization but not: what was done with these resources?
• In these systems, variance from budget drives performance evaluation rather than what was done with the resources given
• Performance measures on quality, delivery time as well as on satisfaction and effectiveness are typically not available or not an integral part of the budgeting process
© Corporate Renaissance Group24
Implementing an ABC System...Implementing an ABC System...
Identify objectives, and organizational structure, resources, products and services
Identify activitieswithin each cost/Responsibility centre
Integrate with existing financial and operational systems
Build ABC model
Process for Continuous Improvement and Refocus
Post-implementation
challenges
Senior management
buy in
Story boarding
Systems experience
ABC software
Process experience
© Corporate Renaissance Group25
ABC implementations do not require sophisticated systems architecture and
networks
ABC implementations do not require sophisticated systems architecture and
networks
• If the organization has a G/L (line item reporting), then implementing of ABC and PM systems is not very costly or time consuming after the initial activity and service maps
• Activity (process) and non-financial performance data be developed through consultation with relevant managers and employees (often exists informally).
• In initial development minimize numbers of activities/indicators (significant ones)
© Corporate Renaissance Group26
Premises/solutions (continued)Premises/solutions (continued)
• ABC systems are periodic - they are not transactional. Thus, Off-line ABC systems are better. ABC systems also require operational data on outputs
• In the absence of these systems, organizations do not have the basic information on their performance
© Corporate Renaissance Group27
Incorporating ABC/PM into a Performance-oriented budgeting
system
Incorporating ABC/PM into a Performance-oriented budgeting
system
• Link financial system to ABC and Performance Measurement Systems and then allocate/manage budgets
FinancialSystem
(ResourceInfo.)
ABCResources
to Activities to outputs
PM
Organization-wide
Performance Measures
Budget
Planning and Resource Management
© Corporate Renaissance Group28
FinancialSystem
Cost centre Costs
Activity Costs
Unit costs
Performance measures
ABC Costs to cost object
•ABC modelling•Activity mapping
Operational systems
ABC System
The PM System
© Corporate Renaissance Group29
Success criteria for Implementing Costing and Performance Measurement
Systems
Success criteria for Implementing Costing and Performance Measurement
Systems
• Political and Senior Bureaucrat Support
• Reflected in organizational vision and “values”
• Embedded in planning, decision-making, reporting and incentive systems
• Seen as strategic and tactical “management” tools
• Driven by need for improved performance measurement and accountability
• Ready to accept approximately right rather than precisely wrong information