The mayor of Golden City is not happy with the rising costs and
deteriorating quality of services provided by the city’s municipal
workers, particularly in the transportation department: Paving
roads, repairing potholes, and cleaning the streets. He is thinking
about 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 to government services
requires real cost information, 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 and financial systems of Golden City
report only how much is being spent in each department by type of
expenditure: payroll, benefits, materials, vehicles, equipment
(including computers and telephones), and supplies.
- A) Before outsourcing to the private sector, why does the mayor want to develop activity-based cost estimates to the current cost of performing these municipal services?
- B) How should the staff estimate capacity cost rates and time demands that are required for an activity-based cost system?
- C) After building activity-cost models, should this information be shared with the municipal workers? Why or why not? How might the workers use the activity-based cost information?
