Use of activity-based costing in the public sector

Abstract

Activity-based costing (ABC) is widely used by private sector manufacturers and service providers, in order to establish accurate costs of producing individual products and providing individual services. ABC argues that activities consume resources to generate products and services. It focuses on the allocation of the costs of overhead resources to products and services, which was traditionally performed on an arbitrary basis. In effect, the main task with ABC is to identify, for overhead or indirect costs, the relevant activities that consume the costs and the basis for allocating the costs of these activities to the various products and services. Activity-based costing works is useful in two situations: areas with large and growing expenses in indirect and support costs, and areas with a large variety in products, customers, and processes. Since government is characterized by a significant number of services or products, which are provided using the same organizational support, administration, and overheads, the use of ABC in government could be appropriate. This thesis will start by describing the characteristics of the four stages of cost systems development that organizations may experience. It will then describe governmental accounting and financial reporting and identify the stage of cost systems development reached by governmental cost systems. In a third step, the thesis will explain the steps to be followed in the implementation of ABC and operational feedback systems. Finally, the thesis will describe ABC efforts in government, both at the local and federal level.