The pressure to deliver more services, for less money, and with greater transparency is becoming the norm in the public sector. This new norm, which comes with significantly increased financial scrutiny, calls for tough measures. Or does it? Innovative financial management techniques could assist the public sector in this call for greater efficiency. As they say – ‘every pound is a prisoner’, and how funds are allocated can often make a huge difference to an organisation’s outcomes.

Activity-based costing (ABC) is one such financial management technique. ABC fell out of favour in the 1990s, but it is making a comeback, albeit with a bit of a makeover. First and foremost, ABC represents a commercial approach to the financial workings of an organisation.

Traditionally, resources within the public sector are managed through financial budgets organised around organisational structure rather than services. When pushed to provide a cost for a service, the public sector body can quantify any direct costs involved but not how its highest costs – staff and facilities – have been applied in the delivery of the service. This relates to both those directly involved in front line services and support services.

At its simplest, activity based costing drives efficiency by allocating costs based on the use of resources in the delivery of distinct services. And it’s back in favour as public sector bodies require greater transparency of how its resources are being used on activities and how effective these activities are in delivering required outcomes.

At the heart of ABC, and possibly why it’s not been in favour within the public sector, is its bold commercial approach to costing. To measure the cost of a service and take into account resource costs, the resource used must be measured – which often means recording time spent. Timesheets allow accountability for what people are actually doing, and for this cost then to be allocated to services. This is a challenge for the public sector, and for those that wish to use ABC or take a similar approach, a culture change is definitely required.

At a time when local authorities and other public sector bodies are making big decisions about services, it is crucial that these decisions are made on the basis of the correct information. Activity based costing could throw a spotlight on services which look cost effective but which are actually a drain on the purse when seen in the light of manpower expended weighed up against the number of people that use the service.

It makes sense that an efficient organisation would not remove services without understanding what that service actually costs - yet this is all too common.

So, with reduced funding levels, activity based costing can ensure that the public sector gets more bang for their buck, create heightened awareness of what activities actually cost, and help consolidate functions by identifying what drives the cost.

For organisations that want to move to activity based costing, there are some basic functions that need to be put in place. Potentially, some new software will be required for time recording, or a new cost accounting system. Structures for internal charging will be put in place, and above all, a cultural shift is needed.

Although there is not necessarily an ethos of profit making within the public sector, a more commercial approach to costs creates better judgement. This isn’t to say that activity based costing is as easy as ABC, but the significant impact that it can have on spending and service decisions are certainly compelling reasons to take a look.

Campbell McLundie is a partner at Scott-Moncrieff, business advisers and accountants.