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Indianapolis Cost Analysis for City Services

The document discusses Indianapolis' activity-based costing (ABC) model for analyzing city services. It implemented a 5-step process to identify 35 activities and allocate expenses accurately. While challenges exist, like determining asphalt installation costs, ABC provides a more effective solution than traditional methods. The document also recommends allowing municipal employees to see ABC estimates and reduce costs, with oversight of overhead expenses. It provides sample calculations for fixing potholes by quadrant based on the ABC model. Finally, it notes that continuously outsourcing services requires "fat trimming" like reducing the workforce, but cities must balance cost-cutting with public welfare.

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Dhruvi Nakum
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285 views1 page

Indianapolis Cost Analysis for City Services

The document discusses Indianapolis' activity-based costing (ABC) model for analyzing city services. It implemented a 5-step process to identify 35 activities and allocate expenses accurately. While challenges exist, like determining asphalt installation costs, ABC provides a more effective solution than traditional methods. The document also recommends allowing municipal employees to see ABC estimates and reduce costs, with oversight of overhead expenses. It provides sample calculations for fixing potholes by quadrant based on the ABC model. Finally, it notes that continuously outsourcing services requires "fat trimming" like reducing the workforce, but cities must balance cost-cutting with public welfare.

Uploaded by

Dhruvi Nakum
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Indianapolis Activity-Based Costing of City Services (Assigned Question)

1. Should governments perform a cost analysis before privatizing government services? Why not "just do
it"?
Ans: Governments should conduct a cost analysis before privatizing any government services. This allows
for a comprehensive assessment of the expenses involved and facilitates the determination of an appropriate
price bid for potential contracts. By conducting a cost analysis, the government can ensure accuracy and
efficiency in pricing contracts
2. Comment on the ABC model developed by the project team. What are its particular strengths and
weaknesses?
Ans: Implementing the ABC approach involved the meticulous execution of its five-step process, which
included consulting employees directly involved in each assignment. Through this, they were able to identify
35 valuable activities. One of the advantages of this approach is the ability to allocate expenses for permanent
assets and underutilized equipment while factoring in depreciation. Although there were challenges in
determining the cost of installing asphalt into a pothole, this could be the most effective solution. Thus, cities
need to develop a more accurate method of calculating such expenses to maximize their benefits
3. Should the city have allowed the municipal employees to see the ABC estimates and given them the
opportunity to reduce their costs?
Ans: It would be beneficial to grant municipal employees access to the ABC estimates and allow them to
participate in cost-reduction efforts. Sharing ABC estimates and providing opportunities to reduce costs could
enhance overall efficiency. However, it is essential to note that overhead costs, especially those associated
with managers, may present a challenge. A quick solution may involve dismissing some supervisors and
reducing costs to improve competitiveness.
4. Calculate the bids the city workers will issue for fixing postholes in the Northwest and Northeast
quadrants.
Ans: From exhibit 6, I will multiply quantity and rate and get an estimated bid.
For NorthWest: (2.60*23.25) + (2.60*20) + (0.35*44.49) + (1*22) + (2.5*1.54) + (1*8.65) + (1*17.65) +
(0.6*15.20) + (1*2) + (5.55*17.06) = 285.98
For NorthEast: (2.60*11.18) + (2.60*23.08) + (1.15*28.01) + (1*22) + (2.5*1.54) + (1*8.6) + (1*11.26) +
(0.6*18.22) + (1*2) + (6.35*19.56) = 304.14
5. What problems will Mayor Goldsmith and his senior administrative team have to solve if they want to
continue to outsource city services through competitive bidding? How would you advise them to deal
with these issues?
Ans: If a city chooses to continuously outsource its services through competitive bidding, it may be necessary
to engage in "fat trimming" efforts. This could involve downsizing the workforce, selling unused fixed assets,
and regularly updating cost estimates. However, exercising caution and moderation when outsourcing services
is essential, as aggressive cost-cutting measures could result in a "race to the bottom" scenario, where private
companies are prioritized over public welfare. For instance, dismissing half of the supervisors to lower costs
may not be advisable.

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