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A Guide to Costing Service Delivery for Service Standards

October 1995




Table Of Contents

Introduction

Why are delivery costs included in service standards?

Principles for costing service delivery

How can cost information be communicated?

Roles and responsibilities

Further information about service standards

Guides available to estimate service costs

Annex A: Service Delivery Cost Examples




Introduction

The service standards initiative is a government priority that reflects a commitment to be more open and responsive to Canadian taxpayers. The 1994 Budget committed departments to establishing standards of service that inform their clients of what services are available, how they can expect the service to be delivered and what they can do if they feel the service provided does not meet the standards. Establishing service standards requires departments to identify their service lines, identify and consult with clients and staff, develop and publish standards and performance against the standards, and strive to improve service over time.

Previous budgets, as well as letters from the Secretary and President of the Treasury Board, have laid out government plans and actions on service standards. Service Standards, A Guide to the Initiative published by the Treasury Board Secretariat provides more details and background on the general initiative. In particular, the Guide discusses how to go about establishing service standards.

From 1994 Federal Budget:

"The government will ensure that its services to Canadians are more affordable, accessible and responsive."

"The government will establish and publish by 1995 standards of services for each government department."

The government guide on costing is the Guide to the Costing of Outputs in the Government of Canada (Treasury Board Secretariat, 1989); which provides a model for costing outputs in a variety of situations. This service standards costing guide discusses the costing of service delivery for the purpose of informing clients and is aimed at managers developing service standards. In most cases, managers will also need to get help from their departmental financial and costing experts. Determining the cost of services and displaying that information is the responsibility of departments.

Informing clients of costs is not new. The Treasury Board's policy on External User Charges for Goods, Services, Property, Rights and Privileges is aimed at making clients aware of the costs involved in providing services where services are provided for a fee to specific groups. Establishing service standards calls for costs to be determined and displayed for a wider variety of services.


Why are delivery costs included in service standards?

The federal government provides many services without a direct charge for their use. The majority of services are paid for by the public through taxation. As a result, except where user fees are in place, the price paid by the public for specific government services is currently invisible.

One of the objectives of the service standards initiative is to promote a client-oriented approach to providing services to clients and the public. This includes identifying and taking into account their expectations and knowing what service delivery aspects are important to our clients. But without relevant cost information, the expectations of service users may be unrealistic and their preferences on service delivery inconsistent with what we can produce. And it is difficult for service users to have realistic expectations when they are unaware of the costs of the services they receive.

Routinely disclosing the costs of delivering services will

  • encourage departments to consult with their clients on less costly service delivery alternatives, and evaluate the efficiency of programs and services;
  • equip departments with financial data to inform ministers on the effects of resource reduction;
  • inform taxpayers what they are getting for their tax dollars;
  • demonstrate government openness and transparency; and
  • increase accountability of public managers through visibility and comparability of service costs.

Informing clients of service costs is expected to

  • make clients aware of the costs of government services;
  • modify clients' expectations so that they
  • are more willing to understand changes in service delivery, and
  • in some cases, modify their use of services; and
  • improve clients' (and taxpayers') understanding of user charges, where applicable.

Determining costs is essential for good management of programs and services. It is needed for determining user charges, for informed allocation of resources among service delivery components, and for decision-making that is based on affordability. Good cost information will help promote and support public discussion about the difficult service choices and trade-offs we face.


Principles for costing service delivery

The objective of costing service delivery in relation to service standards is to inform the public of the costs of the services they pay for as taxpayers and receive as service users. The practicalities and expense of producing such cost information are also important considerations. The principles below will help balance the need to inform the public and the feasibility of determining and communicating service costs.

All elements of cost should be accounted for

The basic principle is that all elements of cost should be identified and accounted for. The general costing approach and methodology to follow are those in the Treasury Board's Guide to the Costing of Outputs in the Government of Canada, namely full costing. This method is also the basis of the Treasury Board policy on External User Charges on Goods, Services, Property, Rights and Privileges.(1)

The full cost (cash and non-cash) of delivering a service is the sum of all costs, direct and indirect, incurred by the government to deliver the service. Specifically, the cost elements which need to be accounted for are:

Direct Costs(2): Costs that are incurred only as a result of the production of goods and services and that are precisely attributable to their provision. Direct costs should be relatively straightforward to identify and measure. Direct costs normally include direct labour, including employee benefits; direct operating costs such as travel, professional services, etc.; direct material costs; and capital acquisitions (to the extent that these capital acquisitions will form part of the service output).

Capital-related costs: There are two types

Principles for Service Standard Costing

1. Account for all elements of cost.

2. Use service costs that inform the user.

3. Display costs for a sensible aggregation of services.

4. Display costs along with service outputs.

5. Examine whether service costs are comparable for similar services.

Briefly.....

"Each department has unique needs for information. A single set of costing rules could not cover all these requirements adequately. However, an appropriate use of the concepts and practices outlined in the guide will go a long way toward achieving a consistent approach to cost accounting across government."

From: "Guide to the Costing of Outputs in the Government of Canada", OCG, 1989

Depreciation of Capital Assets: Depreciation is the process whereby the cost of capital assets is spread over the period of expected benefits. Under the full costing method, depreciation of capital assets such as buildings, facilities, machinery and equipment should be included in service delivery costs.

Cost of Capital: The cost of capital represents the cost to the government of financing the assets used in carrying out its activities. This cost is not reflected in departments' accounting records and requires a separate calculation for the purpose of service costing. The Guide to the Costing of Outputs in the Government of Canada explains how to calculate this element of service cost.

Overhead Costs: Goods and services delivered within an organization usually incur common expenses that cannot be traced directly to a specific product or service. An allocation of these indirect expenses, such as corporate administrative and program support overhead costs, should be made to the service being costed. Exclusion of these costs would lead to understatement of full service costs.

Costs Incurred by Other Government Departments: The full costs of services provided by other government departments to support a program activity/delivery (e.g., accommodation, cheque issue, legal services, etc.) should be allocated and included in costs. The costs would normally be added to the corporate and administrative overhead costs unless they are directly attributable to a specific product or service.

A key to accurate depiction of costs is to distinguish between cost and expenditures. Cost is the economic value of all resources used to provide a good or service. In addition to annual cash outlays, cost includes non-cash outlays such as depreciation of capital assets and cost of capital. Expenditures, on the other hand, are cash outlays incurred in a particular period.

It is recognized that owing to a lack of detailed costing data, full costing of some services may not be immediately feasible in some departments. In such situations, expenditure information can often be displayed until such time as cost data are available. Where expenditure information is displayed, the information should include direct expenditures and all indirect expenditure items, such as overhead and expenditures incurred by other government departments. In government-owned facilities-where there is no rent-and in the case of other depreciable capital expenditures, the capital asset expenditures incurred should be displayed separately. A statement should be provided indicating whether the costing information provided excludes annualized capital costs such as depreciation.

Managers should consult departmental financial services concerning the availability of financial data before displaying expenditure or cost information. In addition, managers should consider the implications associated with the display of expenditure information, such as extraordinary expenditures over time and other anomalies. Year-to-year information should be comparable, as illustrated in Annex A.

Where expenditure information rather than cost information is being used to inform clients, it must be clearly labelled as funds actually disbursed in a particular period. A brief statement identifying the excluded elements such as capital assets, depreciation and the costs of capital, should be provided.

Annex A provides some illustrative examples of cost and expenditure information that might be communicated in given situations.

2. Service costs should be informative to the user

Published costs should provide a reasonable idea of the cost to deliver the service; it should be clear to the client what service or group of services is being costed and what the figures represent. Also, the service costs should apply to identified services or groups of services to which the clients can relate. The aim is not to achieve auditable costing precision but rather reasonable, timely, and informative approximations. Whether a transaction costs $53.67 or $48.34 is generally not as important as informing clients that the transaction costs about $50.

The fiscal year to which the costs relate should also be disclosed.

Of course, common sense is required when disclosing the cost data. In some situations, informing clients of cost information may not be meaningful or sensible. In other situations cost information may have already been determined, such as when services are fully cost-recovered and the user fee adequately represents the cost of the service.

3. A sensible aggregation of services should be costed

Unit costing of each individual service transaction or even a single service line may not always be the most meaningful, appropriate or practical level of costing to use. A sensible aggregation of services should be costed, and there are choices about what level of aggregation to use.

Examples of aggregation levels include

  • a set of services being delivered through a single service delivery facility,
  • a specific service line or product over time, and
  • an individual service transaction, such as the issuing of a cheque, and custom services unique to each transaction.

In some cases an array of different services is provided at the same location. When financial systems do not allow for separating the expenditures among the services provided, then an overall cost of providing the set of services may be appropriate. On the other hand, it may be fairly straightforward to make estimates allocating overall costs among the services provided.

Decisions on the level of aggregation will depend on the effort required, the cost of data gathering, time, and the usefulness of the aggregation. It should be noted that displaying the average cost calculated over a range of service outputs may produce a very misleading cost figure for the service in question. For example, average cost per passenger-kilometer for the whole rail passenger system probably greatly overstates costs for some lines and understates costs for other lines.

Annex A provides some examples of costing a set of services.

4. Costs should be displayed along with the service outputs

If the benefit being received from the service is not immediately obvious, it is good practice to display the service outputs along with costs, thus providing some idea of what is being obtained for the costs displayed.

If a transaction is being costed, the output is probably clear to the user and nothing more is needed-individuals receiving a cheque or the result of an application knows what service they are getting. Where a collection of services or service over time is being costed, a short description of the various outputs should be provided. Annex A provides some examples.

5. Costs must be clear and able to withstand comparison

It should be expected-and indeed encouraged-that service costs will be compared. Comparisons may be over time or between different services, across locations, between different levels of jurisdiction or with the private sector. Comparing or "bench marking" is essential to good management. The publication of costing data should encourage public servants to question their costs and those of their colleagues and learn from sharing experiences and practices.

So long as the costs and methodology allow for credible comparisons based on transparent information, differences in service costs can be explained. Managers are expected to be able to explain and defend published costs of services in their areas of responsibility.

Providing costs that are comparable over time is enhanced with knowledge of past costs and an idea of likely changes in future costs, especially major capital expenditures. Similarly, information on the costs of like services is useful, as well as costs in other jurisdictions. With the adoption of technology and quality management practices, unit costs of service delivery should decrease over time, or at least not increase significantly.

Costs based on full costing will be comparable between similar services. However, at present, experience and capacity in full costing vary widely across government departments. To avoid publishing costs for similar services that appear to be inconsistent across departments, the Treasury Board Secretariat will assist departments in ensuring that similar services are costed in a similar manner. Departments with similar services will be asked to comment on the proposed cost information. Departments can then be ready to explain and minimize differences. Before publishing service delivery costs, departments are asked to contact their Program Branch analyst.


How can cost information be communicated?

To include service costs in annual reports and service expenditures in Part III of the Estimates may be a good way to inform parliamentarians and perhaps the public at large, but this approach would be less effective in communicating with individual specific service clients. Furthermore, those reporting approaches may not adequately distinguish the cost of service benefits from the cost of service delivery (e.g. the cost of UI payments vs. the cost of administering UI).

The aim of the service standards initiative is to inform clients of service standards (and their costs) at the point of service. Cost information would normally be provided as part of the service standards being displayed. This provides for a wide variety of situations to communicate cost information For example:

  • when the services provided are being described in posters, pamphlets, videos, speeches, etc., cost could be an integral element of the description;
  • where service standards are posted at the point of service (such as in offices, entrances to parks and museums, airports, etc.), cost information could be included;
  • when, as part of the service transaction, forms are used, cheques issued, licences or tickets sold, etc., the form, cheque, licence or ticket could indicate the cost of the service; and
  • when information is requested, the response could include the cost of providing the information.

Roles and responsibilities

Departments are responsible for establishing service standards and informing their clients of service standards, including the costs of delivering the services. Service delivery managers are expected to take the lead in this development. Departmental financial services are expected to be able to advise managers on practical and accurate ways of determining relevant costs of service delivery.

Treasury Board Secretariat is managing the government-wide service standards initiative. To ensure comparability of costs, it is expected to act as a clearinghouse of service delivery cost information and to assist departments in publishing adequate cost information.


Further information about service standards

You can find out more about the service standards initiative by consulting these publications.

Quality and Affordable Service for Canadians : Establishing Service Standards in the Federal Government (progress report, February 1995). This document is a review of all the components of service standards and includes many examples reporting the progress made by departments on service standards. It also includes the draft Declaration of Quality Service. An executive summary of this report is also available: An Overview of Quality and Affordable Service for Canadians : Establishing Service Standards in the Federal Government.

Service Standards: A Guide to the Initiative (February 1995) This guide describes all the components of service standards as well as a step-by-step approach to developing them. A complete case study on service standards is also included.

A Guide to Effective Complaint Systems (Draft, April 1994) This guide focuses exclusively on the complaint and redress mechanisms that should go along with a complete service standards initiative.


Guides available to estimate service costs

The Guide to the Costing of Outputs in the Government of Canada (1989) contains a step-by-step approach to costing. A case study that applies the costing methodology is found in the guide.

The Guide to User Fees (1992) outlines the principles for charging a fee and provides a road map that starts with reviewing services that have identifiable clients and moves on to pricing strategies based on full cost. The Guide shows the importance of detailed analysis and urges departments to communicate their intentions to users and to consult them at the earliest opportunity.

Stretching the Tax Dollar: Make or Buy? Guide (September 1993) is a costing application that allows managers to do a cost comparison of the best option for "making" the service in-house or "buying" it from the private sector.

Stretching the Tax Dollar: Making the Organization more Efficient Guide (September 1993) is written for managers to encourage efficiency by examining costs.

These guides are available from the Treasury Board Secretariat by calling:

Treasury Board Secretariat
Distribution Centre
(613) 995-2855, FAX (613) 996-0518, or write to:
300 Laurier Avenue West,
Ottawa, K1A 0R5.


Annex A: Service Delivery Cost Examples

The following examples are intended to assist departments in displaying cost or expenditure information on service delivery. These examples are not designed to encompass all types of services and may not be applicable to a specific situation. Professional judgment should be exercised in computing and displaying final cost/expenditure data.

The examples are divided into three categories: (1) those based on full costing, (2) those that provide expenditure information, and (3) an example of displaying the information over a period of years and changing from reporting expenditures to reporting cost information.

1. Examples of Full Cost Information

The following illustrates three examples of cost information where the cost has been determined on the basis of total cost for a number of services provided, the average unit cost, and the cost of a specific service.

Full costs of a services centre

This template will be suitable for an office whose staff provide a variety of services, such as Canada Employment Centres and District Taxation Offices, and where it is reasonable to assume that information at the aggregate level of the office is valuable to customers. Accurate information at a lower level of detail would normally be provided if available.

Template:

  • Description of the service provided.
  • Annual full costs, including direct and indirect costs for personnel and operating and maintenance, depreciation and cost of capital related to fixed assets and inventory, and the full cost of any other government department involvement.

Example:

During 1993-94, this Canadian Employment Centre:

  • processed about 20,000 applications for benefits and employment
  • counselled about 1,200 unemployed persons
  • conducted approximately 120 investigations and appeals, and
  • responded to 40,000 telephone, mail, and in-person inquiries.

It cost approximately xx million that year to provide services from this centre.

Full cost of a service transaction where each transaction is similar

This template would be the goal, at least in the medium term, for most services. This level of information provides the taxpayer with an accurate understanding of the operation.

Template:

  • Describe the unit of service provided.
  • Using the model shown in the Guide to the Costing of Outputs, calculate the per-unit full cost.

Example:

During 1994-95, 3 million cheques were issued at an average processing cost of $1.25 per cheque.

Full cost of a service transaction where each transaction is different

This template would be preferable where users receive customized service. Examples might include replies to access to information requests and responses to ministerial inquiries. However, the expense of tracking this level of detail would have to be considered.

Template:

A reply to an access to information request could include detail on the cost of gathering, preparing and processing the inquiry. The reply would also include details on the price, if any, charged for the request.

Example:

This response to your access to information inquiry cost $2850 to provide. This amount includes the use of resources to search, prepare, review and take care of administration of our reply to you. In accordance with the Access to Information Act, you are being invoiced for $500 for billable time and use of resources.

2. Examples of Expenditure Information

Expenditure information can be used as discussed below if all elements of full cost data are not available. This may occur, in particular, when data on capital assets such as buildings are not known. The following provides two examples of expenditure information. In the first example, the information displayed includes all expenditures, whereas in the second example the capital expenditure is excluded.

Using expenditure elements for a self-contained service organization

To use this template, an organization must be a self-contained entity with very little overhead attributable to a parent organization and very little of its costs covered by other government departments.

Template:

Expenditure elements:

  • Capital expenditures in the year are reported separately.
  • Annual operating and maintenance expenditures.
  • The information must be clearly labelled as expenditures rather than cost.

Service outputs:

such as

  • Annual number of service users
  • Revenue from users (if applicable)

Example: A Museum

During 1994-95, the Museum spent $22 million on operations and maintenance, another $4 million on exhibits and $3 million on capital assets. These figures exclude the cost of capital.

During the same period, the museum attracted 1.4 million visitors and collected $4 million in revenue.

Display of expenditure information where capital expenditure is excluded

In this example, the expenditure information excludes capital expenditures. This example also illustrates the use of expenditure information on a unit basis.

Template:

  • To include all direct and indirect expenditures.
  • If any capital expenditure is excluded, this must be disclosed.
  • The information must be clearly labelled as expenditure rather than cost.

Example:

During 1993-94, the Correctional Service of Canada spent approximately $47,760 to incarcerate each offender in the federal correctional institutions. This does not include capital-related costs. At the end of the fiscal year, there were 12,571 offenders incarcerated in those institutions.

3. Example of a Change from Reporting Expenditure to Reporting Cost Information

This example can be used where a department or agency provides expenditure information in a given fiscal year but, as complete cost data become available, it reports cost information in subsequent periods. The cost information should be displayed in a manner to allow comparison with expenditure information in the corresponding preceding periods.

Example:

Year 1

During 1993-94, the Correctional Service of Canada spent approximately $47,760 to incarcerate each offender in the federal correctional institutions. This amount does not include capital-related costs. At the end of the fiscal year, there were 12,571 offenders incarcerated in those institutions.

Year 2

During 1994-95, the Correctional Service of Canada spent approximately $48,500 to incarcerate each offender in the federal correctional institutions. This amount excludes capital-related costs which, if included, would result to a total cost of $58,500 per offender. At the end of the fiscal year, there were 12,900 offenders incarcerated in those institutions.

Year 3

During 1995-96, it cost Correctional Service of Canada approximately $58,750 to incarcerate each offender in federal correctional institutions. This figure includes capital-related costs. At the end of the fiscal year, there were 12,900 offenders incarcerated in those institutions.

Year 4

During 1996-97, it cost Correctional Service of Canada approximately $59,800 to incarcerate each offender in federal correctional institutions. At the end of the fiscal year, there were 12,800 offenders incarcerated in those institutions.

1. If considering what financial resources will be saved by reducing or eliminating a service, fixed costs that are incurred regardless of the level of service provided, should be examined. Second, the avoidable variable costs that would not be incurred if the service was reduced or eliminated, should be examined.

2. What direct costs are (as opposed to indirect costs, such as overhead) depends on what level of service is being costed. What are indirect costs in one situation may be direct costs in another case.


Notes

(1) If considering what financial resources will be saved by reducing or eliminating a service, fixed costs that are incurred regardless of the level of service provided, should be examined. Second, the avoidable variable costs that would not be incurred if the service was reduced or eliminated, should be examined.

(2) What direct costs are (as opposed to indirect costs, such as overhead) depends on what level of service is being costed. What are indirect costs in one situation may be directed costs in another case.