Activity-based Models for Cost Management Systems.

• Author: Simpson, Wayne K.

Activity-based costing (ABC) is one of the newest and most empowering financial tools in recent years. Ronald Lewis reviews the subject in a concise and easy-to-follow manner. He focuses on the manufacturing environment where ABC started; however, the forces that caused this costing revolution in the private sector are similar to what is now occurring in the public domain.

The political environment in recent years is pressuring government at all levels to better manage their costs of providing services and programs for their customers; that is, the citizens they serve. Traditional financial and management tools do not meet these needs. The time is upon us to better account and control our costs.

While cost accounting is widespread in the private sector, it has been nonexistent in government. This is why government agencies at the federal, state, and local levels are considering ABC. The Federal Accounting Standards Board encourages government entities to study the potential of ABC in their operations. The Governmental Accounting Standards Board in its Concepts Statement No.1 Objectives of Financial Reporting states: "Financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity." The GASB also states that information about physical resources also should assist in determining cost of services.

At the local level the same pressures prevail. For example, an independent government evaluation group known as the Pepper Committee recommended to the mayor of Indianapolis in 1989, that the city develop a cost accounting system. While city officials are considering techniques, such as popular reporting, performance budgeting, and performance measurement, these tools are incomplete without appropriate cost data. Cost data force a government to know and report the cost of performing services for its citizens (customers) as well as to analyze and understand the factors that drive the costs. Knowledge of costs becomes the framework for strategic planning and budgeting at the core service level and provides inroads into process reengineering and activity redesign, also known as activity-based management. Activity-based costing has served that purpose in the private sector and, very recently, in government. Because costing is so foreign to government, finance officials have many questions as to the what and how of ABC. The author addresses those questions.

The book is...