Abc In Public Sector Essay

5228 words - 21 pages

Problems and Perspectives in Management, Volume 12, Issue 4, 2014

Emmanuel K. Oseifuah (South Africa)

Activity based costing (ABC) in the public sector: benefits
and challenges
Peter Drucker (1986), in “Management: Tasks, responsibilities, and practices” states that business enterprises and
public-service institutions, are organs of society which do not exist for their own sake, but to fulfil a specific social
purpose and to satisfy need of society, community, or individual. To achieve the above objectives, managers of these
institutions must plan, control and make decisions about the resources entrusted to their care. A key element of
efficient organizational decision ...view middle of the document...

The purpose of this study was to review the literature about the use of the ABC methodology to overcome
shortcomings in traditional approaches to allocating costs to products and services in the public sector so as to promote
effective financial management and concomitantly, efficient service delivery in the South Africa’s public sector.
Keywords: activity based costing, benefits, challenges, public sector, South Africa.
JEL Classification: M41.

In recent times, South Africa has experienced a
phenomenal increase in service delivery protests.
This has been attributed partly to inefficient
management of public funds by municipalities.
According to the Auditor General’s 2010/2011
financial year local government audit outcomes
report, only 13 of the 283 (6 metropolitan, 46 district
and 231 local) municipalities in South Africa
achieved clean audits (Auditor General, Consolidated
general report on the local government audit
outcomes 2010-11). Inadequate human capacity was
identified as one of the root causes of the poor audit
results in local government. Similarly, the AG’s
findings in the 2010/11 audit outcomes revealed that:
1) municipalities failed to account for more than R10
billion in the year, with much of it potentially lost
through fraud and corruption, 2) widespread failure to
comply with public finance legislation and
regulations, and 3) 89% of municipalities did not
comply with legislation on service delivery
performance reporting and 24% of municipalities did
not report at all (Auditor General, Consolidated
general report on the local government audit
outcomes 2009-10).
Emmanuel K. Oseifuah, 2014.

The AG’s findings support ACCA’s (2010) study
which has demonstrated that the general public is
more likely to have a greater trust in public sector
organizations (PSO) if there is a strong financial
stewardship, accountability and transparency in the
use of public funds. The study further pointed out
that strong financial management is vital for PSO
because it impacts on four broad areas, namely: 1)
aggregate financial management – fiscal sustainability, resource mobilization and allocation;
2) operational management – performance, valuefor-money and budget management; 3) governance
– transparency and accountability; and 4) fiduciary
risk management – controls, compliance and
oversight. It is quite clear from the AG’s reports that
municipalities are faced with teething financial
management problems which impacts adversely on
efficient service delivery. This study argues that the
problems facing PSO in South Africa can be
addressed by using ABC methodology instead of the
traditional cost accounting.
While traditional cost accounting (TCA) was
developed to comply with external financial
reporting requirements, it falls short in providing
public sector organizations with the strategic
information needed in today’s environment. A

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