The the services provided by the municipal worker.

The city of Indianapolis
wants to privatize its municipal services. Preceding the privatization process,
the government wishes to determine the prevailing cost of performing these
services with its employees. The present financial system has no relevant
information about the cost of what the municipal workers did and has no means
to measure how effectively a certain job was performed. The city forms a team to
study the cost of filling potholes and develops Activity Based Costing (ABC)
system. It displays the ABC cost estimates to the union and enable the workers
to initiate new cost-saving procedures so they can compete and face bidding with
private sectors. This case study outlines how the ABC model is developed and
how does it benefit the city workers with the information received from the new
cost system.

government perform a cost analysis before privatizing government services? Why
not “just do it”?

We believe that government should perform a cost
analysis before privatizing government services, this is because cost analysis
will provide government with cost
information for them to accurately price the bid for privatization. How could
they know what to expect if they don’t have the cost of the services they want
to outsource? This will also bring to light the benefit and justification of
outsourcing some government functions to private companies. Especially if they
found out they are expending more in the process than the bid they got from
private companies. The taxpayers will
also know how much government services cost, like filling potholes etc.

In the case of Indianapolis, their financial
system record does not have information about
the services provided by the municipal worker. However, using proper cost
analysis method like activity-based
estimates gave the municipal worker adequate information about the cost of
their activities. Also in doing the cost analysis,
they could submit their own bid with private companies; with that, they will know if they are competitive
with the private companies.

addition, this will give the workers
opportunity to improve their performance. With proper cost analysis, they could look at a specific service and know how much
each activity will cost and thereby look
at ways to eliminate certain cost or at least reduce cost.Development of ABC modelThe newly formed project team
focuses on a service that is easily understood and is important to every
citizen.The study for ABC model was
scheduled during pothole repair contract. The following strengths and
weaknesses are based on ABC analysis while carrying out work on pothole repair
contract. The
strengths of ABC analysis in this project are as follows:1)   
Decrease in investment: with ABC
analysis, cost drivers which are of high value can be lowered as much as possible.
This will also help in reducing the investment in materials used for a specified
job.For example:
putting a ton of asphalt in potholes is a cost object for studying cost of
filling potholes.2)   
Strict control: tight control can be
exercised on the cost drivers that have highest value.Example:
The cost of carrying multiple tasks with the same resources, such as patching
crew was waiting for the asphalt to be picked up and delivered to the pothole,
the crew had been used for doing other jobs, like sweeping a bridge or picking
up limbs. 3)   
Economy: ABC analysis is economic as it
gives detailed information on cost required to do a specific work with low
Removing 50% of the supervisors and changing the crew assignments for filling
potholes, from eight down to four or six and improving efficiencies in the use
and assignment of equipment which lead to cost reduction. The weaknesses of ABC analysis in this project are as follows:1)   
This method can’t be efficient if the
cost drivers are not assigned into the groups appropriately for instance, the
team initially faced difficulty in defining outputs for some activities for
example, filling potholes, fixed asset and indirect support costs to pothole
ABC analysis doesn’t have standard
classification for cost driver grouping, which makes it difficult to assign
materials or cost drivers.3)   
Difficulty in implementing change in
larger organizations. The team had to convince union to incorporate all the
actions needed to lower cost such as removing supervisors, managers…etc.  Should
the city have allowed the municipal employees to see the ABC estimates and
given them the opportunity to reduce their costs?The government sector had no relevant data and
costing system to check what employees did, what was the cost incurred in doing
their task and how efficient their task was. For instance, the pothole-filling
team had not been aware of the number of take-home vehicles allocated to them,
their annual supplies budget, and their costs for rent and maintenance of both
their facilities and their vehicles. In many cases, the ABC estimated
employees’ hourly wages to be only 20% of the fully loaded cost. Whereas before
ABC, management might have placed that number at 80%–90% of the cost.

Before attempting to privatize the municipal services, it is recommended
that the city managers should have allowed the Subject Matter Experts of
municipal department to view the ABC estimates to help them understand the
costing involved in doing a certain job. It would have made them aware of the
cost, and given them a chance to make efforts to improve it. They would also
deal with a bid process based on ABC costing so that both the municipal
employees and the private firms would be convinced that ABC costing was