Rough Cut Activity Based Costing

Rough-cut Activity-Based Costing (R-c ABC) has been derived from Activity Based Costing (ABC) for use by local authorities and was the main approach used in the first phase of the National Process Improvement Project (NPIP).

ABC is a method of allocating costs to products and services that has been used in manufacturing and service sectors for many years. It helps organisations work out the true cost of producing products or delivering services. In R-c ABC, overheads are allocated to specific activities (and then products or services) by initially assigning them to people in the departments carrying out the work. Each individual has an associated cost which includes salary, national insurance, pensions and an apportionment of other overheads such as accommodation etc. As these individuals spend time on activities, the activity cost is derived from the time it takes to complete, multiplied by the total cost (salary, on-costs and overheads).

Activities are the constituent parts of processes and by adding together the costs of all activities that go to make up a process, the total process cost can be determined. This is irrespective of who does the activities, where they sit in the hierarchy and which department they are in. When the full process cost is known, the cost of individual transactions (or products or services) is calculated by dividing that cost by the volume of the event that is driving the cost (the cost driver).

Whilst it was originally developed for commercial firms, ABC is now increasingly being applied to the service sector. It has been adapted by a number of local authorities to focus on calculating the value of staff time devoted to a range of activities and is highly applicable in a planning context. In planning authorities, the focus of R-c ABC has been centred on quantifying the costs of staff time. The only on-costs which have been considered for this exercise have been the normal on-costs of national insurance and pension.

Rough-cut ABC differs from conventional ABC in a number of respects: 

It avoids obscure terminology such as “cost objects” and “micro-activities” and uses simple language

It is not necessary to deploy it at the enterprise level, and is easily used at process or service delivery level

Its approach is quicker and simpler to implement and uses easily learnt methods of data collection and analysis

It is complementary to SPRINT and other BPR methodologies

It can be used to build a business case for proposed process improvements

This simplification is possible because the local authority market has very specific needs that differ markedly from the commercial sector where small percentages of differences in efficiency within service delivery may dramatically change the cost and competitiveness of a product in the market place.  The changes happening within local government and especially with regard to e-Government have typically double digit percentage efficiency improvements so the need for high accuracy is not as important as the basic demonstration of the order of magnitude of improvement.

These differences allow the technique to be used in order to provide management with information that can identify the best way to improve processes and/or develop a business case for change. In commercial organisations where profitability is important it can be valuable to understand costs “to the penny”. However, in local authorities this is not necessarily the case. R-c ABC is therefore used to give direction and prompt action.

For example, it is not important for a local planning authority to distinguish whether the average cost of processing a minor application is £350 or even £375. What may be important is to recognise that if the average fee income from the application is only £150, the council is potentially incurring a disproportionate level of cost in processing these applications and should be looking to increase its efficiency by 100%! As ever, the real challenge is in making the changes to realise the benefit and it is strongly advised that time is better spent on implementing the change than on trying to calculate whether the true cost is £350, £375 or somewhere in between.

R-c ABC allows management to develop a plan of action because it:

Quantifies the way that staff spend their time – At the most basic level, R-c ABC is used to assess how much staff time is involved in carrying out particular activities.

Identifies the costs of activities that add value and do not add value – This involves looking at each element of work that people carry out in a process and categorising them as value adding, sustaining, or non-value adding in the eyes of the customer.