Analyze the cost of key programs and activities by converting line-items into activity-based budgets
Traditional line-item budgets do not reveal the true cost of an organization’s activities because overhead and indirect costs – such as salaries or office space – are not fully captured in activity unit costs. Activity-based costing (ABC) uses cost drivers to allocate overhead and indirect costs to each one of an organization’s activities. This enables leaders to understand the true cost of each activity, budget strategically, operate efficiently, and prioritize activities that are in demand.
ABC can be implemented at different levels of an organization and with varying granularity. The implementation timeframe can be a few months to a few years, depending on the scope and granularity of the implementation.
During a crisis, city leaders can use ABC as a tool to allocate resources and re-engineer processes with higher-than-expected costs. Adopting ABC comes with start-up costs, but in the long term it can deliver strategic value that usually pays for itself.
ASSESSMENT
Some questions to guide your thinking
- If your city is already implementing ABC, how can leaders use it strategically to allocate resources during the pandemic?
- Are there opportunities to scale up ABC use in your city or department?
- If your city is considering implementing ABC, which departments or units could benefit from piloting the tool?
- What level of granularity would increase your city's ability to allocate resources during the pandemic?
Resource
Implementing activity-based costing (ABC) in government
Institute of Management Accountants (IMA)
The article walks local government leaders through the process of implementing ABC using an example from the Texas Department of Agriculture.
Reading
Understanding the challenges and promise of program budgeting
Government Finance Officers Association (GFOA) 10 minutes
This article provides recommendations for developing a program budgeting approach and overcoming common implementation challenges.
- Program budgets bring more transparency into the budgeting process, enabling meaningful discussion of benefits and costs.
- Program budgets clarify trade-offs between various spending options.
Reading
Implementing time-driven activity-based costing (ABC)
Harvard Business Review (HBS) 15 minutes
In this reading, Harvard’s Robert Kaplan discusses the innovation of time-driven ABC and argues that it is quicker to implement due to its simplicity and cost-effectiveness. This innovation can be used to pilot the use of ABC for budgeting.
Reading
Grasping the value of adopting activity-based costing (ABC) during a crisis
Governing 5 minutes
This reading discusses ABC’s merits offering comparisons with different service delivery models. ABC can help leaders argue for programs that don’t operate at maximum efficiency and become the connective tissue between cost analysis and priority-setting.
- Activity-based costing shifts the focus from “what” was spent to “why” it was spent.
- Conditions might have finally aligned for ABC to become a more widely used tool.
Resource
Implementing activity-based costing (ABC) in government
The article walks local government leaders through the process of implementing ABC …
Reading
Understanding the challenges and promise of program budgeting
This article provides recommendations for developing a program budgeting approach …
Reading
Implementing time-driven activity-based costing (ABC)
In this reading, Harvard’s Robert Kaplan discusses the innovation of time-driven …
Reading
Grasping the value of adopting activity-based costing (ABC) during a crisis
This reading discusses ABC’s merits offering comparisons with different service …