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Aligning Accounting Systems and Performance/Cost Information – the Accrual Reform and Taximeter in Denmark
Special Advisor, Ministry of Finance
David Fjord Nielsen
SBO, Paris 27-28 October 2008
30.06.2008 2
Agenda
1. The Accrual Reform, the Chart of Account and Cost Information
2. Danish Experiences and a View on detailed Cost Information
3. Activity-based Budgeting in the Sectors of Health and Education
4. Benefits and challenges in the Taximeter Model
30.06.2008 3
Accrual Accounting/Budgeting and Cost Information
Background
• Danish state agencies’ and departments’ operational expenditures and associated capital spending transferred to accrual accounting 2005 and budgeting 2007
• Covering around 10 pct. of the state budget
• A new cash management scheme and a new chart of account in 2007
Purpose
• Increase managerial freedom and incentives to plan investments
• Improve cost information – “hidden” cost revealed in the agencies
30.06.2008 4
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InvestmentIT-systemRunningcost
Level of Appropriation: Expenditures and Cost
Expenditures Cost
30.06.2008 5
The State Chart of Account
• Chart of Account is aligned to handle accruals but not to provide standardised cost or performance info. to FM/Parliament
• State’s chart of account: Mandatory general categories (wages, depreciations) and specifications (standard wage, overtime wage)
• Agencies have internal accounting specifications – (types of purchases) and dimensions (project, office, time) for the agencies internal economic management
• Standardisation and comparability across agencies vs. local needs
30.06.2008 6
Downsides to detailed Cost Information
• FM focus on the big numbers. Decentralised responsibility for cost control and performance management to line ministries
• Unit cost info and detailed budgeting to specific services/tasks requires detailed cost allocation – no matter if the accounting system is in accruals or expenditures
• Need to have a purpose: comparable units, an idea of the ”right” cost, a better budget method (activity volatility) or possibly outsourcing
• Most agency programmes, projects or services cannot be managed by unit cost
30.06.2008 7
Beneficial use of Cost Information in specific Areas
• Procurement – extra mandatory specifications to the chart of account
• Establishment of Shared Service Centre – need for cost information (what is the cost of a support function: accounting, ICT)
• Efficiency Targets in Performance Contracts
• Activity based budgeting:
- new pilots – budgeting to unit cost of production
- the taximeter model in education and health care
30.06.2008 8
Taximeter in Education and Health Care
• Rates for each type of education are set in the annual Budget
• Rates for operations according to DRG (Diagnose Related Group system)
• Both systems: a block appropriation and activity based appropriation
• Rates are being paid to institutions according to the number of produced operations / number of full-time students following and completing their studies
30.06.2008 9
Rates for diff. Types of Educations in 2009 Budget
EducationEducational rate
Complete-ment rate
Support-service rate
Capital rate
Security Guard
9.000 Euro 1.000 Euro 2.000 Euro 2.000 Euro
Farming 10.000 Euro 1.000 Euro 2.500 Euro 2.000 Euro
Fitness instructor
9.000 Euro 1.000 Euro 2.000 Euro 2.000 Euro
Baker 10.500 Euro 1.000 Euro 2.000 Euro 3.000 Euro
30.06.2008 10
Activity-based Budgeting: Efficient Allocation of Funds to Hospitals and Educational Institutions
• Quasi-market: Funds are automatically reallocated between different hospital/institutions and educations as a result of actual activity/demand.
• Transparency and equality: Allocation of funds is based on objective criteria (number of students or operations); not possible for strong institutions/hospitals to obtain bigger budgets through negotiations
• Effectiveness: Gives an incentive to service improvements (to attract students, patients) and output delivery (produce operations, masters) to gain funds
30.06.2008 11
Downsides of Activity-based Budgeting:
• Difficult to set rates according to real costs due to information asymmetry
• Detailed cost studies to define rates – DRG vs. political
• Institutions and hospitals tend only to draw the governments attention to increasing costs (and not decreasing costs)
• Education: Rates are based on average costs and not the marginal costs of an extra student
• Health care: Marginal costs above production target, but when?
• Lower quality as a result of the economic incentives?
30.06.2008 12
Marginal Cost at Production Target of 200 Operations
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