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COSTING & PRICING FOR GOVERNMENT SERVICES

By Chandra Wadhwa,

CCM, Immediate Past President, ICWAI, 9810518190

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INTRODUCTION

Government services are complexCosting them appropriately is challenging because of the extraordinary diversity in services Services rendered by various departments are exchanging their services among themselves Multiple stakeholders and interests in such servicesThe ever- changing environment in which services must be delivered The difficulty in fairly allocating certain costs that do not have a link to servicePerformance and Accountability are now mainstream practices in Govt

COSTING OF POST & TLEGRAM1. Printing of post cards

Tender Enquiry for PapersTender Enquiry for PrintingEvaluation of TenderPlacing of Order

2. Storage & issues of post cardsReceipt of Post CardsInspection including countingStorageIssuing of Post Cards to different Post Offices

3. Sales of post cards to various post offices4. Collection of dak from the boxes provided at various places in the country 5. Sorting of dak6. Despatch of dak to various destination through local transport, railway, etc7. Collection of dak from railway by Head Post Office 8. Sorting of dak at Head Quarter9. Sending of dak to various Post Offices10. Distribution of dak to the addressee

In addition, there is Indirect Cost like Accounts Department, Administration

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SERVICES OF GOVT DEPTT

INTERNAL EXTERNAL

ONE ACTIVITY(PASSPORT DEPTT)

MULTIPLE ACTIVITIES (SERVICES)(MUNICIPALTIES)

HEALTH, EDUCATION, REGISTRATIONOF BIRTH, DEATH, LAND. WATER, SANITATION, MAINTENANCE OF ROADS

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PRE-REQUISITE FOR SERVICES TO BE COSTED–AN APPROACH

A consideration of the following factors can assist in developing a clear description and understanding of the service that is to be costed:

What is the context within which the service is delivered (i.e. Government goals, relevant policy issues, directives, standards or principles of operation)?What government desired outcome does the service address?Is the service measurable in a verifiable and consistent manner?What are the processes associated with delivering the service and where do they begin and end?Does the service cover an entire function? andWho has responsibility for delivery of the service?

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COSTING ASPECT

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TOTAL COST

DIRECT COST INDIRECT COST CAPITAL RELATEDCOST FREE SERVICES

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DIRECT COST

STAFFING COST OTHERS

Wages / Salaries

Superannuation

Insurance Premium

Uniform

Training

Housing Facilities

Traveling Exps

Energy & Water

Maintenance

Consumable Supplies

Cost of Inventory

Recurring Exps on office Equipment

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INDIRECT COST

Indirect costs are those which are not directly attributable to the output/Operation. They are sometimes referred to as overheads and can include, for example, ‘Head Quarter Cost’ costs such as the chief executive officer's salary or costs associated with Executive Administration, Financial Services, Human Resources, Records Management, Information Technology and rental of real property (i.e. buildings and land).

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CAPITAL RELATED COSTS

Depreciation of Physical AssetsOpportunity Cost of Capital

When an asset is used in the production of more than one output then it will be necessary to allocate its capital-related costs to each of the outputs in much the same way that Indirect costs are allocated.

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SERVICES AND RESOURCES RECEIVED FREE OF CHARGE

Payroll ServicesAudit ServicesLegal ServicesComputer ServicesMedia Services

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COSTING OF SERVICES-A CASE STUDY

Specialist Warehouse Operations is a division of a department providingwarehousing services to other government agencies and the private sectorfor high value items such as information technology, medicalEquipment and medical supplies.

The Division's output is shown in the department's budget statements as“Procurement, Storage and Distribution of Goods”. This output has tworelated activities – “Operations” and “Administration” Operations activity is concerned with the receipt, stores, issues and security of goods Administration activity is concerned with human resource, finance and

general administrative support functions.

The Division operates from a large warehouse building owned by the Government

The total operation handles goods worth more than $300 million per annum

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DIRECT & INDIRECT COST Operations Administration Total ($ 000) ($ 000) ($ 000)

1. Salaries and wages 5,130 2,956 7,990(including superannuation)

2. Other staffing costs 1,162 920 2,0823. Telephone 0 120 1204. Office supplies 0 50 505. Floor space rental 700 500 1,2006. Cleaning 0 56 567. Power and water 0 150 1508. Maintenance 50 120 1709. Insurance 0 56 5610 Contracted delivery of

goods to customers 1,260 0 1,260

Total 8,302 4,928 13,230(Direct Cost) (Indirect Cost)

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DEPRECIATION Depreciation

Charged ($000)

• IT Equipment 320 • Security Equipment 100 3. Communications 700

Equipment

TOTAL 1,120

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OPPORTUNITY COST OF CAPITAL

Assets ($ 000)1. Cash at bank 1,0002. IT Equipment 1,8403. Security Equipment 1,0004. Communications Equipment 4,0005. Gross assets 7,840Less

Liabilities 1,000Net assets 6,840

(Opportunity cost of capital = 10% x $6,840,000 = $684,000)

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SERVICES RECEIVED FREE OF CHARGE

For the purposes of this exercise, the parent department’s accounts are assumed to be audited at no charge by the Office of the Auditor General. The value of this service is estimated to be in the order of $30,000 of which the Division’s allocated share is $10,000.

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TOTAL COST(FULL COST OF SERVICE)

($000)• Direct Costs identified in accounts 13,230• Depreciation 1,120• Opportunity Cost of Capital 6844. Services received free of charge 10

Total full cost 15,044

The cost of services amounts to 5% of the total operations handled

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COMMON GOVERNMENT SERVICES&

PRICING

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COMMON GOVERNMENT SERVICE

Sl.No. Item Purpose Ministry/ Department// Orgn

1 Power Charges Domestic use CEA/SEB’s/SED’s/E Elec.Industrial use Supply UndertakingsAgricultural use

7 Water Charges Drinking Jal Boards/irrigationIrrigation Depts / Municipal BodiesIndustrial CWC, Central Ground

3. Postal charges Postal articles like PC, Department of Postsenvelope & parcels,Money orders, registered dak,Postal stamps, telegrams etc.

4. Health services Charges Charges for diagnostic tests, like blood,sputum, urine, X-ray, ECG, CT Scan, Hospitals/dispensariesHospitalisation charges in general/special wards like ICU, cardiology, ortho etc.Registration chares which may include consultation charges in Hospitals /dispensaries Charges for medicines during hospitalisationSale of family planning contraceptives, pillsand devices

6Education &Training (higher& technical0Tuition FeeHostel fee (lodging charges)Charges for facilities like swimming pool,gymnasium, etc.Laboratory charges, computer & otherspecialised equipment use chargesCharges levied for participation in studytours, conferences and project workHigher & TechnicalInstitutions in Engineering,Medicine, Management,Science etc. under Ministryof HRD, UGC, AICTE

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COMMON GOVERNMENT SERVICE

5 Education & Training Tuition Fee, Hostel fee (lodging charges) (higher & technical) Charges for facilities like swimming pool, HRD, UGC, ICTE

gymnasium, etc. Laboratory charges, computer & other specialised equipment use charges Higher & Technical

6.. Passport Fee Fee for issue of passports, identity MEAcertificates & services rendered thereon

7. Police verification Verification by police and issue of verification certificates on request of MHAemployers and other agencies Issue ofvoters’ identify cards Fee for issue of visa

8. Examination Fee Examination and other fee charges by UPSC/SSCUPSC/SSC & Other Rectt. Boards

9. Entry charges For entry into trade fairs ITPOFor visiting historical and national CULTURALmonuments and other such places ofinterest For visiting museums

10. Toll charges Charges levied form commuters using Ministry of bridges, highways etc .under BOLT, BOT Surface &

Transport

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COMMON GOVERNMENT SERVICE

11. Parking Charges In respect of vehicles in the parking areas Railways, AAI, etc in Govt. premises particularly in metro/urban areas- hospitals, airports, railway stations, ports and offices with public dealings.

12. Filing Fee Annual Return, Annual Accounts & Other MCAdocuments, Inspection

13. Passenger Fee Fares levied for passenger transport inRailways, Metros and other mode of Ministry of Railways transport undertakings & Transport Concessional fares, passes for students, employees, senior citizens, MPs etc. levied by railways, etc.

14. Registration Charges For transfer of immoveable property MOUD /STATE GOVT

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PRICING ASPECT IN GOVT. SERVICES

MEANING OF FEES, CHARGES & TAXES There is a technical legal distinction between fees and charges. FEES : The term 'fee' has been interpreted to mean 'cost recovery.

Therefore, the level of a fee should be set on a basis that gives a reasonable expectation that cost recovery will not be exceeded, in order to comply with the enabling legislative power.

TAXES: If a fee is set at a level beyond what would reasonably be expected to recover costs, in practice it may have become a tax.

If the enabling legislation only provides for a fee, making it a tax would invalidate it.

CHARGES: There is no legal barrier to setting 'charges' to exceed cost recovery

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PRICING – ISSUES AND CHALLENGES

Funding will have a important impact on pricing. Two funding options:

Mix of regular budgets and cost recovery100% revenue-dependent

Under a mixed model, perform which activities/services under regular (appropriation) budgetsComponents of costs to include in prices

What portion of corporate costs?Services provided without charge by other organizations?

TOTAL COST MANAGEMENT IN GOVERNMENT(ACTIVITY BASED COSTING)

WHAT IS ABC

“A cost accounting concept based on the premise

that the products and services

provided by an organization require that organization

to perform activities And

that those activities require the organization to incur costs”

-defined by the Society of Management Accountants of Canada.

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Case Study -Pricing HRD recruitment

The Union Public Service Commission provides staffing and assessment services to Central & State government organizationsNeed to move to a funding model that would explore cost recovery (fee for service basis)Need to link resources to results - Resource Management approach based on the principles of Activity-Based Management (ABM)

TOTAL COST

500,0002520,000102,000CandidatesInterviews for Non written Testcandidates

15,00010 1,500 15 100 RequestsClosing Files

750,0002530,000 10 3,000 Interviews Interviews for written Test candidates

24,00,00010240,000 80 3,000 CandidatesTest Administration

25,00,00010250,000 5 50,000 CandidatesTest Scheduling

100

8

(Rs/Min)

66,27,000ULE= Unit Level of Effort

450,0004,500 45 100RequestsAdvertising & Screening

12,0001,50015 100RequestsProcess Request

Total (Rs)

Minutes

ULE

VolumeDriverActivity HR Assistant Amount (Rs)

COST PER CANDIDATE UNDER ABC

4,800180,000

0000

5,00,0006,000

690,800345

(2,000 Candidates)

Non-written Test Candidates (Rs)

7,2002,70,000

25,00,00024,00,000

7,50,0009,000

59,36,2001979

(3,000 Candidates)

(Rs 1325)

Process Request Advertising & Screening Test Scheduling Test Administration Interviews Closing Files TOTALCOST PER CANDIDATE

COST PER CANDIDATE AS PER TRADITIONAL COSTING

Written Test Candidates (Rs)

Cost Per Transaction

345

1979

1325

0

400

800

1200

1600

2000

2400

Type of Models

Rs.

ABC Cost Average

ABC Cost 345 1979

Average 1325 1325

NON WRITTEN TEST CANDIDATES

ABC V/s TRADITIONAL COSTING

1325

WRITTEN TEST CANDIDATES

NON WRITTEN TEST CANDIDATES

1325

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BENEFITS FROM PRICING OF GOVT. SERVICES THROUGH ABC

Helps identify the level of resources required to perform each activity and how changes in expected outputs affect the required activities Budgets based on expected workloadAllows for a better communication of strategy and objectives

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BENEFITS .. CONTD

A discipline that focuses on the management of activities and cost drivers as the route to continuous improvement as well as customer value creation.Helps achieve optimal utilization of resourcesIncludes both Activity-Based Costing (ABC) and Activity-Based Planning and Budgeting (ABP/B)

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CONCLUSION

1. Performance and Accountability Costing of services should be an integral part of a Govt framework for measuring the economy, efficiency and effectiveness of performance, and for establishing accountability agreements on service performance

2. Cost of ServicesAll Govts need information on the costs of services. Every size & level of Govt is confronted with its constituents dual expectations of fiscal economy and improved delivery of public services. A Govt cannot manage public resources effectively in this environment without costing information that provides answers to certain questions: What will it cost to deliver these services? Are the programs that deliver these services cost-effective? How do the costs of services compare to a similar commercial services? How much should be charged for these services to recover costs? Is there any alternative, less costly, way to deliver these services?

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CONCLUSION

3. External and Internal Services All Govt activities can be linked to services. Govt resources are used primarily to deliver external services to the general public. Some resources are also used to provide executive services to the council of Ministers and employees of the Govt. These are similar to those provided to Corporate executives and boards of directors of a Private-sector Organization.Internal services include various types of overhead, such as finance and human resources, but may include a number of common services, such as maintenance of infrastructure and equipment. The main challenge in costing is assigning Internal service costs accurately and cost effectively to activities that are consumed by external & executive services. Activity Based Costing is excellent tool for Cost Allocation

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CONCLUSION4. Integration of ABC Model with Costing & Performance

measurement process Activity accounting technique should be used for costing services. To capture the unique nature of Govt operations, the Activity Based Costing model needs to be integrated with the Costing & Performance measurement process. That process shows that costs are driven by the activities producing the outputs for the services. The process is based on the following principles:

Objectives drive the work done by a Govt to achieve its desired outcome Activities represent the logical breakdown of Organizations into

homogeneous work units Resources are driven by the activities Activities are driven by the Cost Objects- Govt Services Performance measures reflect the efficiency and effectiveness of service

delivery

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CONCLUSION5. Consistency

Costs must be determined on a consistent basis. The value of service cost information comes from using it from comparative purpose, Actual Cost Performance Vs Budget Outsourcing Vs In-house cost

6. Importance to CostingCosting of services must be embedded in a Govt’s values & systems. The costing of services is not viable unless it is supported by top management driven by the values & systems that a Govt uses to manage & report on operations

7. Linking cost of services and performance information is crucial. Because of the importance of Performance Measurement & Accountability to good Govt, Costing must b integrated with performance.

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Thank You