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Output Costing and OutputBudgeting
Part-2: Upgrading InfrastructureProfessor Tarun Das
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Contents of this
presentation Role of output budgeting in
Public Administration of
Mongolia An overview of output costing
and output budgeting
Upgrading infrastructure forcosting and budgeting
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1.Role and Benefits ofOutput Budgeting
in Mongolia
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1.1 Role of output budgetingin Public Administration
To identify the nature, quantity and qualityof outputs that can be produced within theGovernments fiscal limits;
To identify strategies to reduce costs; forexample, to eliminate or privatize non-
essential or non-value-adding activities;To monitor performance of each activity;To project the future costs of outputs for the
medium term;
To renegotiate the quantity of the outputs toensure budget constraints;
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2. An Overview of OutputCosting and OutputBudgeting
2 1 S K S i O
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2.1 Seven Key Steps in OutputCosting
and Output Budgeting
a) Determine the outputs to be budgetedb) Define the required costing structure.
c) Review the existing costing systems.
d) Select costing methods andtechniques.
e) Design costing system changes.
f) Cost outputs and prepare reports.
g) Use the output costing information.
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2.2 Step-1:Identify Cost Objects
The first step in any costing exercise is toidentify the relevant Cost Objects.
A Cost Object is anything for which a separatemeasurement of cost is required.
Under output budgeting, the Cost Objects can bea cost centre, an output class, an output, a sub-
output or an activity that an agency is expectedto deliver under the Strategic Business Planendorsed by the government.
These outputs will be funded by thGovernment.
Agencies are required to cost these outputs as abasis for their budget allocation.
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2.3 Step-2:Define the Required Costing Structure
The costing structure depends on the following
factors:The purpose of the costing system- to
provide management with detailedinformation about costs at all activity levels
The costs to be assigned through thesystem- to arrive at the fully costed outputs,the total costs of the agency must berelevant, accrual based and fully attributed.
The existing cost structure -The existing cost
structure should be examined to ensure thatthe cost elements meet these criteria.
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2.4 Step-3:Review the Existing Costing System
Basic purpose is to keep theimplementation cost of output costing asminimum as possible; and to avoidfrequent and unnecessary changes.
The review should also take into accountsystems changes so as to take benefits ofimproved cost management and to makethe output budgeting consistent withsystems development.
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2.5 Step-4:Select Costing Methods and
Techniques By this stage, agencies have a good
understanding of their existing costcollection and assignment systems. They know how they would mee
requirements for output budgeting. It is now necessary to devise ways to
bridge the gaps between the existingsystems and the output budgeting needs.
The Governments requirement is that anagencys costing methods must providean accurate estimate of the total cost ofdelivering each output.
In larger agencies, it may be appropriateto use a variety of costing methodsincluding Activity Based Costing (ABC).
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2.6 Step-5:Design Costing System Changes
Necessary changes in the existing costingsystem may be designed for collection andassignment of the costs according to thecosting methods selected.
The choice of data collection and assignment
tools depend upon: the existing system;
the results of a cost-benefits analysis ofintroducing new costing systems; and
The availability of financial resources andtechnical manpower to implement andoperate new costing systems.
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. ep :Use the Output Costing
Information Output costing can deliver vital information
to management for effective decisionmaking. It can provide information on:
cost of outputs for budget submissions; required changes to the funding of outputs;
actors responsible for variances betweenbudgeted and actual costs;
value-adding activities; how processes can be changed to make the
agency more effective and efficient; How the agency can improve service
delivery within given resources.
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2.8 Step 1 Determine CostObjects
- the Outputs to be Costed
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2.9 Step 2 Define the RequiredCosting Structure-The level and
purpose of
the costing system
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2.10 Step 3 Review andUpgrade the Existing Costing
System
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2.11 Step 4 Select AppropriateCosting Methods and
Techniques
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2.12 Step 5 Design CostingSystem Changes
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2.13 Step 6 Cost Outputs andPrepare Reports
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2.14 Step 7 Use the OutputCosting Information
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2.15 ABC attributes significant coststo outputs and sub-outputson a cause-and-effect basis
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2.16 Benefits of ABC-Helps in decision making
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3.1 Upgrading Infrastructure
Output costing becomes successful in an
agency only if senior management iscommitted to its introduction and keypersonnel are actively involved in theprocess.
However, the following steps need to betaken for its successful implementation:
Changes associated with output costing inan agency should be introduced in aphased, progressive, and manageable way.
Staff should be trained and briefed on thebasic concepts and methodology for outputcosting and output budgeting.
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3.2 Upgrading Infrastructure
Detailed guidelines with explanations and
examples need to be prepared and given to thestaff indicating how to identify activities andoutputs and to link these to inputs and costs.
The benefits of the system should be explained
to staff in addition to giving them opportunitiesto raise questions and concerns and to indicateconstraints.
Skills need to be developed to interpret theinformation produced by the costing system.
Variances between actual and budget outputcosts need to be accounted for.
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Thank you
Have a Good Day