COSTING & PRICING FOR GOVERNMENT SERVICES difficulty in fairly allocating certain costs that do not...
Transcript of COSTING & PRICING FOR GOVERNMENT SERVICES difficulty in fairly allocating certain costs that do not...
01/13/09
COSTING & PRICING FOR GOVERNMENT SERVICES
By Chandra Wadhwa,
CCM, Immediate Past President, ICWAI, 9810518190
01/13/09
INTRODUCTION
Government services are complexCosting them appropriately is challenging because of the extraordinary diversity in services Services rendered by various departments are exchanging their services among themselves Multiple stakeholders and interests in such servicesThe ever- changing environment in which services must be delivered The difficulty in fairly allocating certain costs that do not have a link to servicePerformance and Accountability are now mainstream practices in Govt
COSTING OF POST & TLEGRAM1. Printing of post cards
Tender Enquiry for PapersTender Enquiry for PrintingEvaluation of TenderPlacing of Order
2. Storage & issues of post cardsReceipt of Post CardsInspection including countingStorageIssuing of Post Cards to different Post Offices
3. Sales of post cards to various post offices4. Collection of dak from the boxes provided at various places in the country 5. Sorting of dak6. Despatch of dak to various destination through local transport, railway, etc7. Collection of dak from railway by Head Post Office 8. Sorting of dak at Head Quarter9. Sending of dak to various Post Offices10. Distribution of dak to the addressee
In addition, there is Indirect Cost like Accounts Department, Administration
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SERVICES OF GOVT DEPTT
INTERNAL EXTERNAL
ONE ACTIVITY(PASSPORT DEPTT)
MULTIPLE ACTIVITIES (SERVICES)(MUNICIPALTIES)
HEALTH, EDUCATION, REGISTRATIONOF BIRTH, DEATH, LAND. WATER, SANITATION, MAINTENANCE OF ROADS
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PRE-REQUISITE FOR SERVICES TO BE COSTED–AN APPROACH
A consideration of the following factors can assist in developing a clear description and understanding of the service that is to be costed:
What is the context within which the service is delivered (i.e. Government goals, relevant policy issues, directives, standards or principles of operation)?What government desired outcome does the service address?Is the service measurable in a verifiable and consistent manner?What are the processes associated with delivering the service and where do they begin and end?Does the service cover an entire function? andWho has responsibility for delivery of the service?
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COSTING ASPECT
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TOTAL COST
DIRECT COST INDIRECT COST CAPITAL RELATEDCOST FREE SERVICES
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DIRECT COST
STAFFING COST OTHERS
Wages / Salaries
Superannuation
Insurance Premium
Uniform
Training
Housing Facilities
Traveling Exps
Energy & Water
Maintenance
Consumable Supplies
Cost of Inventory
Recurring Exps on office Equipment
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INDIRECT COST
Indirect costs are those which are not directly attributable to the output/Operation. They are sometimes referred to as overheads and can include, for example, ‘Head Quarter Cost’ costs such as the chief executive officer's salary or costs associated with Executive Administration, Financial Services, Human Resources, Records Management, Information Technology and rental of real property (i.e. buildings and land).
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CAPITAL RELATED COSTS
Depreciation of Physical AssetsOpportunity Cost of Capital
When an asset is used in the production of more than one output then it will be necessary to allocate its capital-related costs to each of the outputs in much the same way that Indirect costs are allocated.
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SERVICES AND RESOURCES RECEIVED FREE OF CHARGE
Payroll ServicesAudit ServicesLegal ServicesComputer ServicesMedia Services
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COSTING OF SERVICES-A CASE STUDY
Specialist Warehouse Operations is a division of a department providingwarehousing services to other government agencies and the private sectorfor high value items such as information technology, medicalEquipment and medical supplies.
The Division's output is shown in the department's budget statements as“Procurement, Storage and Distribution of Goods”. This output has tworelated activities – “Operations” and “Administration” Operations activity is concerned with the receipt, stores, issues and security of goods Administration activity is concerned with human resource, finance and
general administrative support functions.
The Division operates from a large warehouse building owned by the Government
The total operation handles goods worth more than $300 million per annum
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DIRECT & INDIRECT COST Operations Administration Total ($ 000) ($ 000) ($ 000)
1. Salaries and wages 5,130 2,956 7,990(including superannuation)
2. Other staffing costs 1,162 920 2,0823. Telephone 0 120 1204. Office supplies 0 50 505. Floor space rental 700 500 1,2006. Cleaning 0 56 567. Power and water 0 150 1508. Maintenance 50 120 1709. Insurance 0 56 5610 Contracted delivery of
goods to customers 1,260 0 1,260
Total 8,302 4,928 13,230(Direct Cost) (Indirect Cost)
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DEPRECIATION Depreciation
Charged ($000)
• IT Equipment 320 • Security Equipment 100 3. Communications 700
Equipment
TOTAL 1,120
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OPPORTUNITY COST OF CAPITAL
Assets ($ 000)1. Cash at bank 1,0002. IT Equipment 1,8403. Security Equipment 1,0004. Communications Equipment 4,0005. Gross assets 7,840Less
Liabilities 1,000Net assets 6,840
(Opportunity cost of capital = 10% x $6,840,000 = $684,000)
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SERVICES RECEIVED FREE OF CHARGE
For the purposes of this exercise, the parent department’s accounts are assumed to be audited at no charge by the Office of the Auditor General. The value of this service is estimated to be in the order of $30,000 of which the Division’s allocated share is $10,000.
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TOTAL COST(FULL COST OF SERVICE)
($000)• Direct Costs identified in accounts 13,230• Depreciation 1,120• Opportunity Cost of Capital 6844. Services received free of charge 10
Total full cost 15,044
The cost of services amounts to 5% of the total operations handled
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COMMON GOVERNMENT SERVICES&
PRICING
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COMMON GOVERNMENT SERVICE
Sl.No. Item Purpose Ministry/ Department// Orgn
1 Power Charges Domestic use CEA/SEB’s/SED’s/E Elec.Industrial use Supply UndertakingsAgricultural use
7 Water Charges Drinking Jal Boards/irrigationIrrigation Depts / Municipal BodiesIndustrial CWC, Central Ground
3. Postal charges Postal articles like PC, Department of Postsenvelope & parcels,Money orders, registered dak,Postal stamps, telegrams etc.
4. Health services Charges Charges for diagnostic tests, like blood,sputum, urine, X-ray, ECG, CT Scan, Hospitals/dispensariesHospitalisation charges in general/special wards like ICU, cardiology, ortho etc.Registration chares which may include consultation charges in Hospitals /dispensaries Charges for medicines during hospitalisationSale of family planning contraceptives, pillsand devices
6Education &Training (higher& technical0Tuition FeeHostel fee (lodging charges)Charges for facilities like swimming pool,gymnasium, etc.Laboratory charges, computer & otherspecialised equipment use chargesCharges levied for participation in studytours, conferences and project workHigher & TechnicalInstitutions in Engineering,Medicine, Management,Science etc. under Ministryof HRD, UGC, AICTE
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COMMON GOVERNMENT SERVICE
5 Education & Training Tuition Fee, Hostel fee (lodging charges) (higher & technical) Charges for facilities like swimming pool, HRD, UGC, ICTE
gymnasium, etc. Laboratory charges, computer & other specialised equipment use charges Higher & Technical
6.. Passport Fee Fee for issue of passports, identity MEAcertificates & services rendered thereon
7. Police verification Verification by police and issue of verification certificates on request of MHAemployers and other agencies Issue ofvoters’ identify cards Fee for issue of visa
8. Examination Fee Examination and other fee charges by UPSC/SSCUPSC/SSC & Other Rectt. Boards
9. Entry charges For entry into trade fairs ITPOFor visiting historical and national CULTURALmonuments and other such places ofinterest For visiting museums
10. Toll charges Charges levied form commuters using Ministry of bridges, highways etc .under BOLT, BOT Surface &
Transport
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COMMON GOVERNMENT SERVICE
11. Parking Charges In respect of vehicles in the parking areas Railways, AAI, etc in Govt. premises particularly in metro/urban areas- hospitals, airports, railway stations, ports and offices with public dealings.
12. Filing Fee Annual Return, Annual Accounts & Other MCAdocuments, Inspection
13. Passenger Fee Fares levied for passenger transport inRailways, Metros and other mode of Ministry of Railways transport undertakings & Transport Concessional fares, passes for students, employees, senior citizens, MPs etc. levied by railways, etc.
14. Registration Charges For transfer of immoveable property MOUD /STATE GOVT
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PRICING ASPECT IN GOVT. SERVICES
MEANING OF FEES, CHARGES & TAXES There is a technical legal distinction between fees and charges. FEES : The term 'fee' has been interpreted to mean 'cost recovery.
Therefore, the level of a fee should be set on a basis that gives a reasonable expectation that cost recovery will not be exceeded, in order to comply with the enabling legislative power.
TAXES: If a fee is set at a level beyond what would reasonably be expected to recover costs, in practice it may have become a tax.
If the enabling legislation only provides for a fee, making it a tax would invalidate it.
CHARGES: There is no legal barrier to setting 'charges' to exceed cost recovery
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PRICING – ISSUES AND CHALLENGES
Funding will have a important impact on pricing. Two funding options:
Mix of regular budgets and cost recovery100% revenue-dependent
Under a mixed model, perform which activities/services under regular (appropriation) budgetsComponents of costs to include in prices
What portion of corporate costs?Services provided without charge by other organizations?
TOTAL COST MANAGEMENT IN GOVERNMENT(ACTIVITY BASED COSTING)
WHAT IS ABC
“A cost accounting concept based on the premise
that the products and services
provided by an organization require that organization
to perform activities And
that those activities require the organization to incur costs”
-defined by the Society of Management Accountants of Canada.
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Case Study -Pricing HRD recruitment
The Union Public Service Commission provides staffing and assessment services to Central & State government organizationsNeed to move to a funding model that would explore cost recovery (fee for service basis)Need to link resources to results - Resource Management approach based on the principles of Activity-Based Management (ABM)
TOTAL COST
500,0002520,000102,000CandidatesInterviews for Non written Testcandidates
15,00010 1,500 15 100 RequestsClosing Files
750,0002530,000 10 3,000 Interviews Interviews for written Test candidates
24,00,00010240,000 80 3,000 CandidatesTest Administration
25,00,00010250,000 5 50,000 CandidatesTest Scheduling
100
8
(Rs/Min)
66,27,000ULE= Unit Level of Effort
450,0004,500 45 100RequestsAdvertising & Screening
12,0001,50015 100RequestsProcess Request
Total (Rs)
Minutes
ULE
VolumeDriverActivity HR Assistant Amount (Rs)
COST PER CANDIDATE UNDER ABC
4,800180,000
0000
5,00,0006,000
690,800345
(2,000 Candidates)
Non-written Test Candidates (Rs)
7,2002,70,000
25,00,00024,00,000
7,50,0009,000
59,36,2001979
(3,000 Candidates)
(Rs 1325)
Process Request Advertising & Screening Test Scheduling Test Administration Interviews Closing Files TOTALCOST PER CANDIDATE
COST PER CANDIDATE AS PER TRADITIONAL COSTING
Written Test Candidates (Rs)
Cost Per Transaction
345
1979
1325
0
400
800
1200
1600
2000
2400
Type of Models
Rs.
ABC Cost Average
ABC Cost 345 1979
Average 1325 1325
NON WRITTEN TEST CANDIDATES
ABC V/s TRADITIONAL COSTING
1325
WRITTEN TEST CANDIDATES
NON WRITTEN TEST CANDIDATES
1325
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BENEFITS FROM PRICING OF GOVT. SERVICES THROUGH ABC
Helps identify the level of resources required to perform each activity and how changes in expected outputs affect the required activities Budgets based on expected workloadAllows for a better communication of strategy and objectives
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BENEFITS .. CONTD
A discipline that focuses on the management of activities and cost drivers as the route to continuous improvement as well as customer value creation.Helps achieve optimal utilization of resourcesIncludes both Activity-Based Costing (ABC) and Activity-Based Planning and Budgeting (ABP/B)
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CONCLUSION
1. Performance and Accountability Costing of services should be an integral part of a Govt framework for measuring the economy, efficiency and effectiveness of performance, and for establishing accountability agreements on service performance
2. Cost of ServicesAll Govts need information on the costs of services. Every size & level of Govt is confronted with its constituents dual expectations of fiscal economy and improved delivery of public services. A Govt cannot manage public resources effectively in this environment without costing information that provides answers to certain questions: What will it cost to deliver these services? Are the programs that deliver these services cost-effective? How do the costs of services compare to a similar commercial services? How much should be charged for these services to recover costs? Is there any alternative, less costly, way to deliver these services?
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CONCLUSION
3. External and Internal Services All Govt activities can be linked to services. Govt resources are used primarily to deliver external services to the general public. Some resources are also used to provide executive services to the council of Ministers and employees of the Govt. These are similar to those provided to Corporate executives and boards of directors of a Private-sector Organization.Internal services include various types of overhead, such as finance and human resources, but may include a number of common services, such as maintenance of infrastructure and equipment. The main challenge in costing is assigning Internal service costs accurately and cost effectively to activities that are consumed by external & executive services. Activity Based Costing is excellent tool for Cost Allocation
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CONCLUSION4. Integration of ABC Model with Costing & Performance
measurement process Activity accounting technique should be used for costing services. To capture the unique nature of Govt operations, the Activity Based Costing model needs to be integrated with the Costing & Performance measurement process. That process shows that costs are driven by the activities producing the outputs for the services. The process is based on the following principles:
Objectives drive the work done by a Govt to achieve its desired outcome Activities represent the logical breakdown of Organizations into
homogeneous work units Resources are driven by the activities Activities are driven by the Cost Objects- Govt Services Performance measures reflect the efficiency and effectiveness of service
delivery
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CONCLUSION5. Consistency
Costs must be determined on a consistent basis. The value of service cost information comes from using it from comparative purpose, Actual Cost Performance Vs Budget Outsourcing Vs In-house cost
6. Importance to CostingCosting of services must be embedded in a Govt’s values & systems. The costing of services is not viable unless it is supported by top management driven by the values & systems that a Govt uses to manage & report on operations
7. Linking cost of services and performance information is crucial. Because of the importance of Performance Measurement & Accountability to good Govt, Costing must b integrated with performance.
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Thank You