LO 4, 6

5-34

Financial versus managementaccounting: rolefor activity-basedcost systemsin privatizationof governmentservices

The mayor of Gotham City is dissatisfied with the rising costs and deteriorating quality of the services provided by the city's municipal workers, particularly in the transportation department: paving roads, repairing potholes, and cleaning the streets. He is contemplating privatizing these services by outsourcing the business to independent, private contractors. The mayor has demanded that his staff develop an activity-based cost system for municipal services before he proceeds with his privatization initiative, declaring, "Introducing competition and privatization to government services requires real cost information. You can't compete if you are using fake money." Currently, the accounting andfinancial systems of Gotham City report only how much is being spent ineach department by type of expenditure: payroll, benefits, materials, vehicles, equipment (including computers and telephones), and supplies.

Required

(a)

Before outsourcing to the private sector, why does themayor want to develop activity-based cost estimates of the current cost of performing thesemunicipal services?

(b)

How should the staff estimate capacity cost rates and timedemands that are required for an activity-based cost system?

(c)

After building activity-based cost models, should this information beshared with the municipal workers? Why or whynot? How might the workersuse the activity-based cost information?