Cost and Optimization in Government

An Introduction to Cost Accounting, Operations Management, and Quality Control

Aman Khan

• Publisher: Routledge
• Year: 2022
• Print ISBN: 9781032206875
• eBook ISBN: 9781000557275
• Topic: Politics & International Relations
• Subtopic: American Government
• Index: Politics & International Relations

The careful management of costs and operations are two of the most essential elements for successful operation of any organization – public, private, or nonprofit. This book demonstrates that a good grounding in cost basics, especially those related to cost accounting, operations management, and quality control can help all organizations, in particular government, increase efficiency, improve performance, and, in the end, do a better job of running its everyday operation.

The book is divided into three parts: Part I offers thorough coverage of cost fundamentals, with an emphasis on basic cost concepts, cost behavior, cost analysis, cost assignment, cost allocation, and cost control. Part II deals with optimization in government. Included in this part are traditional or classical optimization with applications in inventory management and queuing, followed by mathematical programming, network analysis, productivity measurement, and games and decisions. Finally, Part III deals with a special case in cost and optimization that has become important in recent years – quality control. Simple, accessible language and explanations are integrated throughout, and examples have been drawn from government so that readers can easily relate to them. Cost and Optimization is required reading for practicing public managers and students of public administration in need of a clear, concise guide to efficient use of public resources.

Part ICost Basics

1Introduction

DOI: 10.4324/9781003275183-2

There is not a single organization anywhere – public, private, quasi-public,¹ or nonprofit – that is not concerned about costs and how to account for them. As organizations become complex, requiring more diverse and intelligent information to survive, the need for cost studies, in particular those related to cost accounting, becomes even more important. The primary objective of cost accounting is to provide cost and related information that are essential for an organization to determine how to run its internal operations, in particular how to explain cost behavior, how to analyze, assign, allocate and control costs, and what measures to take to improve cost performance. In government, where efficiency and accountability have always been a concern, cost accounting can fill an important gap by producing information that is critical to the success of the organization.

Cost accounting is often discussed in conjunction with two other areas of accounting – managerial and financial – although they are not the same. This chapter presents a brief background discussion of cost accounting, as it relates to government, followed by a brief discussion on the differences between cost, financial, and managerial accounting. The chapter concludes with an overview of cost reporting, rules of cost commitment, and ethics in cost accounting.

Background Discussion

Cost accounting is the process of accounting for costs an organization incurs in carrying out its routine and non-routine operations. The process is complex, involving a number of distinct, relatively detailed, and well-defined activities. These activities include gathering, recording, analyzing, summarizing, evaluating, and interpreting cost and related information, and communicating the results to those who would directly benefit from them (Lanen et al., 2020). In government, this would mostly include the chief administrator, elected officials, various agency heads, internal auditors, plus any other individual who is directly involved in the operations of the government.

Although individuals and entities outside of government may benefit from the information the process generates, it is primarily used for internal consumption. The information is particularly useful for budgeting and economic decision making which is concerned with how best to allocate the limited resources of a government to meet its competing needs. Similarly, cost information plays an important role in the financial management and reporting activities of a government. The end product of financial management is a report consisting of a number of financial statements that summarize the financial condition of a government resulting from these activities. The information cost accounting compiles on costs of materials, labor, and work-in-process in the production or delivery of a good or service are often incorporated in preparing some of these statements. Furthermore, the information cost accounting produces is useful in operations management which deals with how best to manage and control the internal operations of a government for increased efficiency and effectiveness. This is where the various tools and methods of optimization, some of which are discussed in the book, become useful in cost studies.

Besides budgeting and economic decision making, financial management and reporting, and operations management and control, cost accounting is also important in planning, especially strategic planning (Shank and Govindarajan, 2008). Strategic planning deals with how best to direct the financial and nonfinancial resources of an organization to achieve its mission, goals, and objectives. The end product of strategic planning is a set of strategies which rely on cost information to determine the best course of action to achieve those goals and objectives. Figure 1.1 shows this relationship between cost accounting and other areas of government operations.

Figure 1.1Relationship between cost accounting and other areas of operation

A Brief History of Cost Accounting in Government

Compared to other fields of study in government, cost accounting has a relatively short history, although it has b...

Table of contents

• Cover
• Half-Title Page
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• About the Third Edition
• Acknowledgments
• Part I Cost Basics
• Part II Optimization Basics
• Part III A Special Case in Cost and Optimization
• Review Questions
• Bibliography
• Index