Abc Report Indianapolis: Activity-Based Costing of City Services

Analysis Report

The case

Indianapolis: Activity-Based Costing of City Services

Executive Summary.

A detailed analysis of the case has been done. The report had justified the Indianapolis Government's decision to run cost analysis prior prioritising its services. It highlighted the strength and weaknesses of Activity-Based Costing system, validated the government's decision to let its employees to become familiar with the ABC estimations for reducing their costs. The comparison analysis was conducted on the revised "new" and previous "old" quotes of the city workers for fixing potholes in Northwest and Northeast districts. Afterword, the report discussed the possible problems that the mayor and his team may face should they continue outsourcing city services through competitive bidding and gave some recommendations on these issues.

The study concluded that the cost-analysis become was beneficial in terms of information provided. However, the cost of this system was too great and its implementation had contributed to unemployment in Indianapolis. The city made the correct decision allowing its employees to see ABC estimates and giving them opportunity to reduce their costs which resulted in integration of employees into a strongly committed team focused on cutting costs and improving performance. At end, the study had warned that the constant outsourcing of government services may lead to the union strikes due to job losses, raising costs of contracts management or the city could be accused in favoritism in award of contracts.

1. Introduction

this report is written to analyse the case "Indianapolis: Activity-Based Costing of City Services". The purpose of this report is to justify the Indianapolis Government's decision to run cost analysis prior prioritising its services, to stress the strength and weaknesses of implemented ABC costing model, to validate the government's decision to let its employees to become familiar with the ABC estimations and to let them reducing their costs. The report is performing the comparison analysis of the revised "new" and previous "old" quotes of the city workers for fixing potholes in Northwest and Northeast districts. Afterword, the possible issues have been outlined and appropriate recommendations given for the problems that the mayor and his team will have if they continue outsourcing city services through competitive bidding and gave some recommendations on these issues.

2. Procedure.

2.1. I analysed the case "Indianapolis: Activity-Based Costing of City Services" and its background.

2.2. I had studied the relevant information about activity-based cost system (ABC).

2.3. I used the Union's estimates of recourses required for two pothole-filling contracts to compare the "new" and "old" quotes for fixing potholes in two Indianapolis districts: Northwest and Northeast.

3. Findings

3.1. The justification of the Indianapolis Government' decision to do cost analysis prior prioritising its services

3.1.1. The performed cost analysis proved:

- The insolvency of the traditional tools used by Indianapolis government prior 1992.

- The government should take the different approach to do business. If the Government had to serve the public the true costs of this serving has to be determined.

3.1.2. The Mayor said that "Government should be measured by the same way every other enterprise is measured: by its results" (Case, p.188). He had a strong faith in market forces, rules of competition and was positive that the fair competition between government and private contractors would serve better to citizens. By this way the mayor was going to fulfil his duties to act for the best interests of his employers, the citizens of Indianapolis who also had rights to know how much does it cost for them to receive this service. That is why the mayor demanded "that departments describe and measure the services they provide as well as the costs of providing these services" (Case, p.189) with the help of ABC.

3.1.3. The Government was considering handing over some of government service to the private companies, if it would be more profitable for the city to do so. "After the election but before entering office, the mayor called the current department leaders and asked them for management and financial reports about their departments' performance." (Case, p.189) However, there were no data on activities costs; they had no performance measurements; there were only budget figures - income and expenses. The performed cost analysis would become the base for comparison of costs of city services and that offered by private contractors. On the base of the performed cost analysis the government could decide which ones of their services were not cost-efficient. Skip Stitt, the first director of the Enterprise Development office said "For some services, such as managing public golf courses, we would ask ourselves if taking a tax dollar out of John Public's pocket to subsidise golf was appropriate at all. If it's not, perhaps we should get out of that business and let the private sector fill the void" (Case, p.189)

3.1.4. The biggest expense for the City Hall was human recourses. That is why the mayor wanted to shrink this expense form start. The mayor sought to "make government smaller, to make it more responsive, and to make its managers think about value - the cost and quality of services delivered to its customers, the citizens" (Case, p.188) The ABC was the tool that helped to analyse the ways of providing services at less costs and be at greater value for customers because "people know better than government" (Case, p.188) ABC analysis helped to determine the cause-effect relationship between government spending and results.

3.2. The strengths and weaknesses of ABC model developed by project team.

3.2.1. Strengths.

a) Detailed information on costs of government services.

Prior: "programs were not linked to dollars. Managers had no idea about the value of the city infrastructure" (Case, p.189).

After: managers were able to identify in details all costs of government services. It was critical information