Management Accounting in Public Service Decision Making

Malcolm J. Prowle

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9781138366169
• eBook ISBN: 9780429773044
• Edition: 1
• Topic: Business
• Subtopic: Decision Making
• Index: Business

Radical changes to public service delivery have swept across many regions of the world. Management accounting methods are vital to support operational and strategic decision making in public services internationally. This book provides a comprehensive and "leading-edge" guide to the topic.

Written by an expert scholar with practical experience of public service delivery, the book takes account of key trends such as increased demand for public services, financial austerity, technological change and enhanced performance management.

A globally relevant book, informed by cutting edge academic research and benefitting from integrated case studies, this is essential reading for both students and practitioners involved with the financial aspects of public services management.

Part B

Management accounting practice in public services

Chapter
7

Costing and cost information for decision making in public services

Introduction

The leading management thinker Peter Drucker is often quoted as saying that “if you can’t measure it then you can’t manage it”. This implies the needs for some form of information and measurement about the activities of an organisation in order to inform the management process and management decision making. By extension, it seems reasonable to also say “if you can’t measure your costs then you can’t manage your costs”. This is the focus of this chapter in relation to public services.

In any organisation, an understanding of the cost structure of the organisation and its activities and the way in which its costs might change in response to internal or external stimuli is critical to the effective management of the organisation. This is why costing can be seen as the bedrock of management accounting.

Historically, public service organisations have not been very good at identifying and measuring the costs of what they do but great improvements are being made in various sectors. Cost information can be used for a variety of reasons in any type of organisation and over a period of years the topic of costing has become increasingly topical within the public services. In this chapter we consider costing approaches in public services and the application of costing systems to produce that information.

This chapter considers the following main themes:

• How cost information can be used to manage public services
• Approaches to the classification of costs
• Costing systems and cost models in public services
• Traditional overhead costing and Activity Based Costing (ABC)
• Identifying and estimating costs in public services
• Difficulties and complexities of costing in modern public services
• Developing costing systems in public services

How cost information can be used to manage public services

Cost information has many actual or potential managerial uses in public services. Some of the main examples of these are discussed briefly below and will be considered, further, in later sections.

Activity cost analysis

In public service organisations, routine information may be produced on the overall costs incurred (and income received) by the various departments or units in the organisation. This information can be used to produce unit cost information of a department/unit such as:

• Cost per patient in medical imaging departments of a hospital
• Cost per student in a modern language department of a university
• Cost per mile of maintaining roads in a local authority
• Cost per client payment in a government social welfare department

However, there are usually limitations as to the level of detail of information available within the individual department or unit. The reality is that each such department or unit often undertakes a wide range of service or support activities and/or delivers a range of public services. However, the cost information currently available is often not always sufficiently granular to enable an analysis to be undertaken of the financial performance of the individual activities and services within the department. The following examples illustrate the need for such information:

• The costs incurred by a sub-unit of the department (e.g. the payroll section of a finance department)
• The costs incurred in undertaking specific activities, within a department/unit, which comprise service delivery (e.g. a client assessment of a social care client, a diagnostic examination of a hospital patient)
• The costs incurred by discrete services delivered within the department (e.g. domiciliary social care for the elderly)
• The costs incurred in delivering services to particular client groups (e.g. the elderly, women) or geographic areas

Such cost information is often needed for a number of reasons. First, it will be of particular importance if the department or unit involved is currently generating an overall financial deficit or overspend but is unaware of which particular activities or services are responsible for that deficit. For example, the modern languages department of a university may be generating a financial deficit but may not have information on the financial performance of the various languages being taught in order to identify the source of the deficit. Second, a department having compared its overall unit costs with that of other comparable departments may wish to establish why its unit costs are (say) 10% greater than its comparators. To do this, it will need a more detailed analysis of the costs of the various activities and services which make up the department. Third, a department may wish to know the impact on its costs of making changes in the (client) activity levels in the department. Again, to do this, an analysis will be needed of the costs (and income) attributed to the discrete activities of the department.

Budget reporting

In a later chapter, budget management and budgetary control is discussed in-depth. It will be clear that a key component of budgetary control is the availability of actual cost information to be compared with budgeted cost. This involves the provision of cost information, which shows an analysis of the income, and expenditure of each department or unit for a particular month in question and the cumulative for the year.

Pricing

Some public services levy charges (in full or in part) on clients for the services received. Clearly, costs are an important input into pricing decisions but are not the sole, or even the most important input. However, to make robust pricing decisions it is essential to have a minimal level of cost information concerning the activity or service to be priced. We will return to this in a later chapter.

Performance improvement and benchmarking

The issue of improving performance, at both operational and strategic levels, is a key theme in all public service organisations given the pressures on public funding. The process of improving performance will focus on value for money or VFM (or the 3Es of economy, effectiveness and efficiency), and financial management will have a key role to play.

A key aspect of this will be the availability of information about the current costs of activities and services, and how such costs may have changed over time or may compare with other similar organisations. It is common practice in public services to try and compare their performance against that of other comparable organisations as a means of identifying potential improvements in performance. Thus, it is quite common to compare its financial performance (e.g. cost per pupil, course, cost per mile of road maintained, cost per book issued, cost per invoice paid, etc.) against that of other organisations, and to do this, it is necessary to have cost information about the costs of one’s own organisation. Benchmarking will be discussed more fully in a later chapter.

Strategic financial planning

As will be discussed in a later chapter, it is inevitable that over a period of time public services will undergo some degree of strategic change in relation to organisational structures, methods of working, staffing levels, remuneration structures, etc. Some examples might be as follows:

• Reducing the number of campuses in a college
• Merging several departments into one in a local authority
• Reconfiguring school education in an area
• Reconfiguring the health service provision in a particular area
• Restructuring the activities of an army regiment

Such changes may be large or small but whatever the case they are likely to have significant financial implications, and it will be necessary to undertake some degree of strategic financial analysis to assess the financial implications of such changes at each stage. It would be very difficult to undertake any robust strategic financial planning in the absence of information about the existing costs of the organisation and its activities. Thus, adequate...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of case studies
• Foreword
• Preface
• About the author
• List of abbreviations
• Part A Context of management accounting in public services
• Part B Management accounting practice in public services
• References
• Index