Interior Department steps up activity-based costing
Interior is adopting activity-based costing (ABC), an accounting system designed to break down in detail the costs of all of an organization's activities. Designed in the 1980s to help manufacturers get a handle on their production costs, a handful of federal agencies have also tried the method, with mixed results. Officials at Interior believe ABC information will help them meet three of the five Bush administration management initiatives: linking performance and budget, competitive sourcing and improved financial management.
"You can't have performance and budget integration unless you actually have ABC," said Lynn Scarlett, Interior's assistant secretary for policy, management and budget, on Tuesday. "It provides you the building blocks to say how much it costs to run a visitor center, to deliver a unit of water or to manage a grazing program."
Interior is the first department to announce it will adopt a new management system-activity-based costing--to help meet the administration's reform goals, but it's not likely the last, Office of Management and Budget Controller Mark Everson told Government Executive in an interview last month. But Everson stressed that OMB will not require agencies to use ABC or any specific management technique.
"We would never mandate one particular kind of approach if the circumstances were better-suited to doing something else," he said. "What we want people to do is like any business, study their business and understand what the best way is to capture the required data so they know what's going on in their operations."
The only Interior agency now using ABC is the Bureau of Land Management, which started developing its system four years ago. Interior's Office of Surface Mining, its Minerals Management Service and its National Business Center are installing ABC systems this year. By fiscal 2004, Interior wants all bureaus in the department to be managing their programs with the method.
Once ABC systems are in place, Interior will require field offices to report the cost of their operations to bureau headquarters and to Scarlett's office, where analysts will study why certain functions cost more to perform than others. Eventually, Interior will use this information to develop best practices and reward successful programs with more funding, according to Scarlett.
"To the degree in our prioritizing we can reward those programs that are effective, it would be the hope that we would incentivize the programs that have not really put a lot of attention into being efficient," she said.
In cases where bureaus provide similar services, Interior will try to develop and implement best practices among bureaus, said Scarlett. For example, the Bureau of Land Management, Fish and Wildlife Service and National Park Service all provide access to recreation areas. Interior could set cost targets for this service that the bureaus would be expected to meet, she said.
Interior is not the only department to accelerate its ABC program in recent months. In November, Army Secretary Thomas White directed Army installations using ABC to file quarterly progress reports with headquarters officials. Installations must report how many of their business areas are using ABC and cite examples of how they are using ABC to improve operations. The first review showed room for improvement, Army Gen. John Keane and Army Comptroller Sandra Pack said in a Feb. 25 memorandum to Army commands. The Army allows installations to keep any savings produced through ABC initiatives, they added.
"We are committed to retaining at the local level any savings that result from the implementation of cost management/ABC," they wrote. "Cost management/ABC is not a method for headquarters to harvest your hard-earned savings."