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Guidelines for Setting Charges in the Public Sector -April 2017

4  Understanding the costs of outputs

This section provides guidance for understanding in detail the outputs and business processes associated with an activity and their costs. All entities are expected to know the detailed costs of delivering their outputs. Understanding these is important to support key decisions such as what outputs to provide, who is best placed to provide them and to what quality. This information is also necessary so that appropriate costs are recovered, over- or under-recovery of costs is minimised, and the entity can manage costs and monitor performance over time, and demonstrate that it is operating efficiently.

As with all aspects of developing cost recovery regimes, the effort put into this should be proportionate to the size and complexity of the costs to be recovered.

4.1  Outputs and costs

What are the outputs and business processes required to achieve the outcomes?

Identifying outputs and processes is an important way of ensuring transparency in the setting of user charges. It should be clear how the outputs contribute to achieving the policy outcomes.

There are a number of different approaches to assigning costs to activities or outputs. Whatever approach is used, the key considerations are ensuring that the full costs are captured and that this is done in a manner that supports decisions such as resource allocation. Assumptions are necessary and critical, and should be made clear, and reviewed regularly against actual performance.

It will typically involve: (i) identifying the underlying business processes; (ii) identifying the direct and indirect costs; and (iii) a methodology for assigning these to each of the processes.

Example: Assessing a permit application to import an animal

Where the output is assessing a permit application to import an animal, the following business processes may be involved:

  • checking the accuracy of information in the application
  • reviewing the application
  • deciding on the application
  • notifying the applicant of the decision, and
  • issuing the permit.

In this scenario, the output (assessing the permit) might contribute to a policy outcome of keeping the resident animal population free from diseases such as rabies.

Costs of production

Once the outputs and processes have been determined, entities should prepare detailed information on the cost of production. Establishing this might include:

  • identifying the different goods and services being produced
  • identifying the resources used in production
  • estimating the volume of each good or service to be produced in a given period
  • estimating the volume and cost of resources required to produce each good and service in that period
  • understanding the direct and indirect cost drivers (more detail on indirect costs can be found on pages 24 and 25 of the OAG guidance), and
  • identifying which costs are sensitive to changes in volume.

Assumptions should be made clear. The approach taken and the level of detail should be proportionate to the complexity and sensitivity of the process.

The fees for a publically produced good or service should, generally, be in line with the cost to produce it.

Example: Direct and indirect costs

Direct Costs

  • The most common direct costs are staff salaries (including on-costs, such as training, superannuation and leave) and supplier costs (eg, office supplies).

Indirect Costs

  • Common indirect costs include overhead costs such as salaries of staff in corporate (eg, finance, human resources) and technical support (eg, legal or IT) areas, or accommodation costs (eg, rent, maintenance, utilities).

Capital costs

The analysis should consider whether capital costs should be recovered, and if so, how they should be recovered (noting that all outputs should be fully costed, but that is separate from the decision as to whether all costs should be recovered).

As a starting point, we typically would expect all costs (including capital charge and depreciation of related assets) to be recovered so that users are paying the true and full cost. Where Government investment is initially required, such as to build a database or other asset to support a cost recovered activity, this investment will often be recovered through the depreciation expense incurred (and charged as a cost) over the life of the asset.

The analysis should cover the cost of production over the life of the capital assets involved, both in the short and the long term, and any other variations such as location or time of service.

Allocating overhead costs

It is reasonable to recover overhead costs to the extent that these costs are necessary for the production of the good or service. As overheads are most likely to be an indirect cost, they should be apportioned using the appropriate costing methodology.

The enabling legislation may also place restrictions on the extent to which overhead costs can be recovered.

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