ABC and Public Sector

Activity based costing (ABC) was developed for manufacturing companies to address the problem of overhead absorption.

ABC regards labour costs as fixed in the short run, in capital-intensive industries, where the bulk of costs are fixed costs. It is inappropriate to allocate overhead costs by labour hours, which are of decreasing significance.


Cost profile of Public Sector

**High levels of overhead are experienced in public sector organizations.
**Labour is often fixed in the short run,
**There are few raw materials and
**Some items of capital equipment are very expensive.

It may not be easy, for example, to allocate a ward sister’s time over the patients in her care. ABC would therefore appear to be appropriate.


Role of ABC

ABC tries to identify those activities on which costs are spent, referring to them as cost drivers. The cost of the service’s individual operations can be determined.

The advantage of this approach is that it take a critical financial view of work practices.

1. High cost activities can be identified.
2. Design. An examination of the cost drivers may result in those activities being better designed.
3. Management. Additional and better information leads to better planning and control.




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