Activity Based Costing/Management for Federal Agencies
In 1995, the Federal Accounting Standards Advisory Board (FASAB) issued
a recommended accounting standard titled "Managerial Cost Accounting
Concepts and Standards for the Federal Government". This standard
was subsequently adopted by OMB and GAO and made binding on federal agencies
effective beginning in 1998.
From the first paragraph of the FASAB standard, it is clear that this
reform is seen as being of fundamental importance to all program managers,
and not just to the agency's accountants.
"1. The managerial cost accounting concepts
and standards contained in this statement are aimed at providing reliable
and timely information on the full cost of federal program, their activities,
and outputs. The cost information can be used by the congress and federal
executives in making decisions about allocating federal resources, authorizing
and modifying programs, and evaluating program performance. The cost
information can also be used by program managers in making managerial
decisions to improve operating economy and efficiency."
Today this managerial cost accounting standard parallels many of the
issues addressed in OMB's Program Assessment Rating
Tool (PART), including the acknowledged relationship to GPRA and the
emphasis on identifying the unit costs of activities, as shown in the
following paragraph from that standard:
"16. The Chief Financial Officers Act of
1990 includes among the functions of chief financial officers 'the development
and reporting of cost information' and 'the systematic measurement of
performance.' In July 1993, Congress passed the Government Performance
and Results Act (GPRA) which mandates performance measurement by federal
agencies. In September 1993, in his report to the President on the National
Performance Review (NPR), Vice President Al Gore recommended an action
which required the Federal Accounting Standards Advisory Board to issue
a set of cost accounting standards for all federal activities. Those
standards will provide a method for identifying the unit cost of all
government activities."
A major theme of the PART is OMB's strong interest in assessing the efficiency
and cost effectiveness of federal programs. The federal cost accounting
standard explains that the key to such determinations is being able to
measure the unit costs of outputs and outcomes.
"35. Measuring costs is an integral part
of measuring performance in terms of efficiency and effectiveness. Efficiency
is measured by relating outputs to inputs. It is often expressed by
cost per unit of output. While effectiveness in itself is measured by
the outcome or degree to which a predetermined objective is met, it
is commonly combined with cost information to show 'cost-effectiveness'."
In order to identify the unit costs of their activities, this accounting
standard urges federal agencies to consider activity-based costing (ABC)
and activity-based cost management (ABC/M) as part of their GPRA performance
measurement.
"147. Several costing methodologies have
been successful in the private sector and in some government entities.
Four are briefly described below for agency consideration. It should
be noted that Activity-Based Costing has gained broad acceptance by
manufacturing and service industries as an effective managerial tool.
Federal entities are encouraged to study its potential within their
own operations."
"149. Implementing an ABC system requires
four major steps: (1) identify activities performed in a responsibility
segment to produce outputs, (2) assign or map resources to the activities,
(3) identify outputs for which the activities are performed, and (4)
assign activity costs to the outputs."
Unfortunately, despite the fundamental importance of this cost accounting
reform, the General Accounting Office
notes that few federal agencies have achieved meaningful compliance.
John Mercer used his experience in a sophisticated
system of governmental activity-based costing and activity-based cost
management as an important reference point in his development of GPRA.
Further information about the relationship of ABC and ABC/M to performance-based
budgeting is found elsewhere on this web site. This information includes
several performance budget examples that
illustrate activity-based costing, a white paper on "Performance
Budgeting for Federal Agencies"  ,
and John Mercer's congressional
testimony
on GPRA implementation.
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