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Cost Studies

Updated: Sep 14, 2020

The same person who is credited with inventing accounting, Luca Pacioli, an Italian mathematician from the 15th century, is also credited with inventing cost accounting. Where “regular” accounting is important for financial statements, cost accounting is essential for determining what products cost and how they should be priced. In large private sector companies, there are more cost accountants than financial accountants. In local government accounting departments, it is unusual to find any cost accountants.

Local government accounting entered its mature stage with the publication of the GAAFR (Blue) Book in 1968. That publication gave an academic and professional foundation to the local government financial statements and accounting that we follow today.

Local government cost accounting had a seminal beginning also in the 1960’s when Doug Ayres was working for Public Administration Service (PAS) at the 1313 Building (E. 60th Street on the University of Chicago campus). PAS was the consulting arm for the many non-profit agencies that are now spread around the country. But, at that time, these agencies were all there:

  1. Municipal Finance Officers Association (now GFOA)

  2. International City Management Association (ICMA)

  3. American Public Works Association (APWA)

  4. American Society of Planning Officials (merged into American Planning Association)

  5. and many others

During a study for the City of Kansas City in the 1960’s, Doug Ayres conceptualized the matching of city service revenues with city service costs. However, in the days of unrestricted property taxes, there was no need for this match-up.

Fast forward to 1978 and the adoption of Proposition 13, and one year later, the adoption of Proposition 4, and the local government financial picture totally changed. Doug was astute enough to recognize that the authors of Proposition 4 had given local government a business model for pricing services which were now limited to the “costs reasonably borne.”

Doug and I created the first match-up of local government revenues and services for the City of Villa Park in California. The report was issued under our names in 1980 and subsequent reports were “authored” by Management Services Institute (MSI), which is now Revenue & Cost Specialists (RCS).

For the first 10 years, we were the only game in town and promoted our services exclusively to city managers who wanted to know:

  1. What was their city doing?

  2. Who was doing it?

  3. How much did it cost? and,

  4. Who was paying for it.

Ted Gaebler, a former assistant of Doug’s, co-wrote “Reinventing Government” in 1992 and the match-up of service revenues and costs became a movement – the birth of cost accounting in local government.

The initial reports were very detailed and took hundreds of hours to prepare. With the popularization of government cost accounting, other firms entered the field. The most notable one was David M. Griffith and Associates (DMG). David and I had both graduated from the University of Chicago. I went on to audit cities, be a finance director, and then join with Doug in doing cost studies. David went to a big CPA firm and used the newly established “A-87” process to calculate local overheads on federal grant programs known as Cost Allocation Plans (CAPs). In the late 80’s and early 90’s, DMG began doing cost studies and MSI/RCS expanded our software to do CAPs.

The competition was good and bad. The good part was that the price of the studies dropped. The bad was that many of the bells and whistles that made the original studies management studies were sacrificed to reduce the cost. The result is the “Fee Study” of today that are usually requested by Finance Directors to generate revenue and not by city managers to understand their organization. Ideally, a cost study should empower each department head to understand what his/her staff are doing, how many they do in a fiscal year, and what the cost is. This information should translate into:

  1. staffing decisions – do we need more/less or should we contract?

  2. pricing decisions – is the service properly priced to manage the demand?

  3. service decisions – should we even be offering this service or are there other services we should offer?

Professional Finance Directors realize that department heads need current financial information and have implemented financial accounting systems that provide timely information. Hopefully, this generation of finance directors will also realize that department heads need current costing information and begin the process of bringing cost accountants into the finance department to provide current management information. Rather than hiring someone to prepare a cost study every “x” years, how about in-house staff doing the work continuously with a cost study review/audit every “x” years?

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