Is Activity‐Based Costing Up to the Challenge When It Comes to Privatization of Local Government Services?

Abstract

After its initial success in the private sector, activity‐based costing (ABC) has been embraced by the public sector as an analytical tool that can be used to improve the efficiency of government operations, especially in the area of the privatization of operations. Despite claims that ABC can greatly enhance the evaluation of how to most efficiently deliver services, there are significant obstacles that must be overcome before ABC can be effectively implemented. In order to underscore the challenges facing successful ABC execution in the public sector, the use of activity‐based cost accounting by the City of Indianapolis for its privatization initiatives is discussed. Generally ABC is not up to challenge of providing local governments with the tool necessary to comprehensively evaluate direct services and determine which are candidates for contracting out or privatization.

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