Activity-based costing (ABC) is the new dynamic of honest budgeting for
both government and private companies.
While
line item budgets reveal much information
about where dollars are being spent, they do not give the full
accounting picture of how much it costs to perform services, nor even
show what those services are!
First Step
A safe way for a government to begin to move towards the
modernization is to start with one small department and have a professional ABC consultant
convert its data into the readable, useful information.
The ABC system provides meaningful budget information in a format
designed to show the goods and services produced and costs
associated directly with activities, rather than across departments. A
clearer look at the overhead cost is accomplished in the process.
Today's budgeters in the overwhelming majority of state
and local governments haven't a clue as to the overhead percentage in
each of the departments to which they are responsible to dole out
taxpayers' dollars.
If you find this hard to believe, go ask one of your elected officials
the percentage of overhead of any department of your choosing. Then, if
you get an approximate answer, ask him/her to give you the paperwork to
back it up. Be prepared to witness a delightful tap dance!
Traditional budgeting and the hidden waste
that results in the lack of sunshine that comes in, can be seen in
tangible deficiencies in government outputs.
In a road department, for example,
Fewer
roads get paved,
Necessary widening projects on dangerous roads don't get performed,
Maintenance isn't performed
at critical times in order to maintain the integrity of the road,
requiring major repairs that never should have been necessary,
Reflectors in the centers of roads don't get placed
for safer nighttime driving,
Roads
are striped less often, and
More
people are injured and die on those roads, in part, due to negligence.
In the Indianapolis model
of government reform, Mayor Goldsmith initially inquired of
his staff as to the actual cost to pave a mile of road in the city and the
cost to fill a pothole. City officials had four-color budget brochures,
about more general costs, but hadn't a clue as to the answers to the
specific costs requested.
The mayor had great need to thereafter go about the work to develop an ABC
budget to find out those answers and
many more like them.
ABC gives an expense analysis that allows elected officials,
budget committee members, management, employees, and the citizen to see
the unit cost of services provided by government. It allows the entity
to see the percentage of its resources going to its critical missions or
core operation vs. the "nice to have" functions.
While ABC is still relatively new, the software used to produce
ABC budgeting is becoming more and more sophisticated.
ABC has its own terminology which takes awhile to learn. But the nice fact about ABC is that
it is intuitive budgeting, the common sense answers one would naturally
expect out of an accounting review (but don't get under the old system).
It's important to note that some of the newest ABC software is being created in HTML to allow for
accessing critical information from workstations and to allow it to be
displayed on the government's website.
Most of the other components of the government of tomorrow are outcrops of ABC.
One would be hard pressed to create competition for services without
knowing what those services actually cost..or even what they are!
The style of management that incorporated ABC is called ABM or
Activity-Based Management. ABC and ABM are often used interchangeably.
The
definitive word on activity-based costing system, translating the
system truly to common "cents."
A mandatory read. World's best selling book on ABC.
Elected officials are swamped and often drown in the minutia of day to
day activities.
Another aspect of budget clarification is a requirement that
government entities create an inventory of their assets: buildings,
bridges, properties, etc.
This requirement is a virtual mandate on the 84,000-plus government districts in
the U.S. Failure to comply could result in a lowering of the
district bond rating and failure to secure expected federal grants. ►GASB
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