Harvard Case - Pricing Police: An Activity-Based Costing Model of Police Services
"Pricing Police: An Activity-Based Costing Model of Police Services" Harvard business case study is written by Vaughan Radcliffe, Mitchell Stein, Adam Erickson. It deals with the challenges in the field of Accounting. The case study is 9 page(s) long and it was first published on : Oct 28, 2016
At Fern Fort University, we recommend the implementation of an activity-based costing (ABC) model for the City of Riverview's police department, replacing the current cost allocation system. This will provide a more accurate and granular understanding of the costs associated with providing police services, leading to improved resource allocation, more effective pricing strategies, and enhanced financial performance measurement.
2. Background
The City of Riverview faces a growing budget deficit and increasing pressure to control costs. The current cost allocation system, based on a simple allocation of expenses across all police services, fails to capture the true cost of providing different services. This leads to inaccurate pricing, inefficient resource allocation, and potentially unfair distribution of resources.
The case study focuses on the Riverview Police Department, led by Chief Miller, who is tasked with finding ways to improve efficiency and effectiveness. The department provides various services, including patrol, investigations, traffic enforcement, and community outreach. The current cost allocation system, based on a simple allocation of expenses across all services, doesn't reflect the varying resource requirements of each activity. This leads to a lack of transparency and hinders the department's ability to make informed decisions about resource allocation and pricing.
3. Analysis of the Case Study
The case study highlights the limitations of the current cost allocation system and emphasizes the need for a more accurate and granular approach. We can analyze the case using the following frameworks:
Strategic Framework:
- Mission and Vision: The Riverview Police Department's mission is to protect and serve the community. The department's vision is to create a safe and secure environment for all residents. The implementation of an ABC model aligns with these goals by ensuring resources are allocated efficiently and effectively to achieve the department's objectives.
- Competitive Advantage: By accurately understanding the cost of providing different services, the department can develop competitive pricing strategies and better allocate resources, enhancing its overall effectiveness and efficiency.
- Resource Allocation: The ABC model will help the department identify and allocate resources more effectively, ensuring that the most critical services are adequately funded.
Financial Framework:
- Cost Accounting: The current cost allocation system is inadequate for accurately capturing the true cost of providing police services. An ABC model will provide a more detailed and accurate picture of the department's cost structure, enabling better financial management and decision-making.
- Financial Performance Measurement: The ABC model will provide more reliable data for performance measurement, allowing the department to track its progress towards its financial goals and identify areas for improvement.
- Pricing Strategy: The ABC model will enable the department to develop more accurate and competitive pricing strategies for its services, leading to improved revenue generation and financial sustainability.
Operational Framework:
- Process Improvement: The ABC model will highlight the inefficiencies in the current cost allocation system and provide insights into potential areas for process improvement within the department.
- Resource Optimization: By understanding the true cost of each service, the department can optimize resource allocation, ensuring that resources are deployed where they are most needed.
- Efficiency and Effectiveness: The ABC model will contribute to improved efficiency and effectiveness by providing a more accurate picture of the department's operations and resource utilization.
4. Recommendations
- Implement an Activity-Based Costing (ABC) Model: The department should adopt an ABC model to accurately capture the cost of providing different police services. This model will allocate costs based on activities, such as patrol hours, investigation time, and community outreach programs.
- Identify Cost Drivers: The department should identify the key cost drivers for each police service. This includes factors like patrol hours, officer training, equipment maintenance, and administrative costs.
- Develop Cost Pools: The department should create cost pools for each activity, grouping related costs together. This will provide a more accurate picture of the cost of each service.
- Allocate Costs: The department should allocate costs to each cost pool based on the identified cost drivers. This will provide a more accurate understanding of the true cost of each service.
- Develop Pricing Strategies: The department should use the ABC model to develop more accurate and competitive pricing strategies for its services. This will ensure that the department is appropriately compensated for the cost of providing these services.
- Develop Performance Indicators: The department should develop performance indicators to track the effectiveness and efficiency of its services. This will help the department measure its progress and identify areas for improvement.
5. Basis of Recommendations
The recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The ABC model aligns with the department's mission to protect and serve the community by ensuring resources are allocated efficiently and effectively.
- External Customers and Internal Clients: The ABC model will provide a more accurate understanding of the cost of providing services, leading to more equitable pricing for external customers and improved resource allocation for internal clients.
- Competitors: The ABC model will enable the department to develop more competitive pricing strategies, allowing it to better compete for resources and funding.
- Attractiveness: The ABC model will improve the department's financial performance by providing a more accurate picture of its cost structure and enabling more effective resource allocation.
6. Conclusion
The implementation of an ABC model for the City of Riverview's police department is crucial for improving financial performance, enhancing resource allocation, and achieving the department's mission. By accurately understanding the cost of providing different services, the department can make more informed decisions about pricing, resource allocation, and overall performance.
7. Discussion
Alternatives:
- Continuing with the current cost allocation system: This option would maintain the status quo, but would continue to provide inaccurate cost data, leading to inefficient resource allocation and potentially unfair pricing.
- Adopting a simpler cost allocation model: While simpler models may be easier to implement, they may not provide the same level of detail and accuracy as an ABC model.
Risks:
- Resistance to change: Some members of the department may resist the implementation of an ABC model due to concerns about its complexity or potential impact on their work.
- Data collection challenges: The department may face challenges in collecting and analyzing the data needed to implement an ABC model.
Key Assumptions:
- The department is committed to improving its financial performance and resource allocation.
- The department has the resources and expertise to implement an ABC model.
8. Next Steps
- Develop a detailed implementation plan: This plan should outline the steps involved in implementing the ABC model, including data collection, cost driver identification, and cost allocation.
- Train staff: The department should provide training to staff on the ABC model and its implications for their work.
- Pilot test the model: The department should pilot test the ABC model on a small scale before implementing it department-wide.
- Monitor and evaluate the model: The department should regularly monitor and evaluate the effectiveness of the ABC model and make adjustments as needed.
By taking these steps, the City of Riverview's police department can successfully implement an ABC model and achieve its goals of improved financial performance, enhanced resource allocation, and greater efficiency and effectiveness.
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Case Description
On January 17, 2015, the Ontario Provincial Police (OPP) released service cost estimates to all municipalities under its new municipal billing model. The new billing model, according to the recommendations of the auditor general, was designed to provide a more consistent, transparent, and accurate reflection of municipal servicing costs. Several mayors were not entirely sold on the new model and had their own opinion on how each municipality should be billed. Municipal officials needed consistent year-to-year service costs to accurately forecast their annual budgets. The OPP had to demonstrate the merit of the new billing model to ensure its adoption by all municipalities.
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