Harvard Case - Indianapolis: Activity-Based Costing of City Services (A)
"Indianapolis: Activity-Based Costing of City Services (A)" Harvard business case study is written by Robert S. Kaplan. It deals with the challenges in the field of Accounting. The case study is 15 page(s) long and it was first published on : Feb 5, 1996
This case study solution recommends that the City of Indianapolis implement an activity-based costing (ABC) system to more accurately allocate costs to city services and improve decision-making. This approach will provide a more comprehensive and insightful view of the true cost of providing services, leading to improved resource allocation, service delivery, and overall financial management.
2. Background
The City of Indianapolis is facing a growing budget deficit and needs to find ways to improve efficiency and effectiveness. The current cost accounting system allocates costs based on traditional methods, such as direct labor hours or square footage, which may not accurately reflect the actual costs associated with providing different city services. This can lead to inefficient resource allocation and difficulty in making informed decisions about service levels and funding.
The case study focuses on the City's Public Works Department, which is responsible for a wide range of services, including street maintenance, snow removal, and garbage collection. The department is struggling to manage its budget and provide adequate services due to the limitations of the current cost accounting system.
3. Analysis of the Case Study
The case study highlights several key issues:
- Inaccurate Cost Allocation: The current cost accounting system does not accurately reflect the true cost of providing different services. For example, street maintenance costs are allocated based on street mileage, but this does not account for the varying levels of maintenance required for different types of streets.
- Limited Decision-Making Information: The lack of accurate cost information hinders the City's ability to make informed decisions about service levels, resource allocation, and budget priorities.
- Lack of Performance Measurement: The current system does not provide adequate performance indicators to assess the efficiency and effectiveness of different services.
To address these issues, the City of Indianapolis should consider implementing an activity-based costing (ABC) system. ABC is a cost accounting method that allocates costs based on the activities that drive those costs. This approach provides a more accurate and comprehensive view of the true cost of providing services, enabling better decision-making and resource allocation.
4. Recommendations
The City of Indianapolis should implement an activity-based costing (ABC) system for its Public Works Department. This system should:
- Identify key activities: Define the specific activities involved in providing each service, such as street maintenance, snow removal, and garbage collection.
- Assign costs to activities: Allocate costs to each activity based on the resources consumed, such as labor, materials, and equipment.
- Allocate costs to services: Allocate activity costs to specific services based on the volume of activities performed for each service.
- Develop performance indicators: Establish key performance indicators (KPIs) to measure the efficiency and effectiveness of each service, such as the number of potholes repaired, the volume of snow removed, and the number of garbage containers collected.
5. Basis of Recommendations
This recommendation is based on the following considerations:
- Core competencies and consistency with mission: Implementing an ABC system aligns with the City's mission to provide efficient and effective services to its citizens.
- External customers and internal clients: The ABC system will provide valuable information to both external customers (residents) and internal clients (City departments) about the cost and performance of services.
- Competitors: While there may not be direct competitors for city services, the ABC system can help the City benchmark its performance against other cities and identify areas for improvement.
- Attractiveness ' quantitative measures: The ABC system is expected to improve resource allocation, reduce costs, and enhance service delivery, leading to increased efficiency and effectiveness.
- Assumptions: The success of the ABC system relies on the accurate identification and allocation of costs and the development of relevant performance indicators.
6. Conclusion
Implementing an activity-based costing system will provide the City of Indianapolis with a more accurate and comprehensive understanding of the true cost of providing services. This information will enable better decision-making, resource allocation, and performance measurement, leading to improved efficiency, effectiveness, and overall financial management.
7. Discussion
Other alternatives to ABC include:
- Continuing with the current cost accounting system: This option would maintain the status quo but would continue to provide inaccurate cost information and limit decision-making capabilities.
- Implementing a simplified cost accounting system: This option might be less complex than ABC but may not provide the same level of detail and accuracy.
The risks associated with implementing an ABC system include:
- Cost of implementation: Implementing an ABC system can be time-consuming and expensive.
- Resistance to change: Some employees may resist the change to a new cost accounting system.
- Accuracy of cost allocation: It is crucial to ensure accurate identification and allocation of costs to ensure the effectiveness of the ABC system.
8. Next Steps
The City of Indianapolis should take the following steps to implement the ABC system:
- Form a project team: Assemble a team of stakeholders from different departments to oversee the implementation of the ABC system.
- Develop a project plan: Define the scope, timeline, and resources required for the implementation.
- Train staff: Provide training to all relevant staff on the new cost accounting system.
- Pilot test the system: Implement the ABC system on a pilot basis before rolling it out to the entire department.
- Monitor and evaluate the system: Continuously monitor and evaluate the performance of the ABC system to ensure its effectiveness and make necessary adjustments.
By implementing an activity-based costing system, the City of Indianapolis can improve its financial management, enhance service delivery, and better serve its citizens.
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Case Description
A new administration in the City of Indianapolis is initially determined to privatize many municipal services. Before taking this action, however, the city managers want to know the current cost of performing these services with the municipal workers. Existing financial systems record how much the city has been spending by functional categories and departments, but contain no information about the cost of providing services. The city establishes a task force to develop activity-based (ABC) estimates of the cost of filling potholes. It shows the information to the municipal workers and allows them to institute new cost-saving procedures so they can submit their own bid in competition with private contractors. This case describes the development of the ABC model and the reaction of the city workers to the newly revealed information.
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