Case 6

A London Borough
Topic: Public sector, activity analysis, value added
Introduction
A new department was set up in November 2002 to promote economic development
and regeneration in the Borough. The departments sta!! manage partnership and
corporate initiatives, provide in!ormation and advice to businesses and developers and
contribute to local policy in the Borough.
Activity Based "osting
A!ter # months in operation the departments manager "lara Bird decided that the $ey
activities need to be analysed to identi!y opportunities !or improving service delivery.
"lara believes a %cost sampling or snapshot approach is re&uired to identi!y $ey
activities and their costs. This techni&ue will help the department to develop
estimates o! how much time is devoted to di!!erent activities and then by using an
average hourly rate !or all sta!! "lara will be able to estimate the total annual cost o!
an activity. The decision to use an average hourly rate !or all sta!! will save time with
the !irst %cost sampling.
'ntroducing a %cost sampling approach has not been tried in the Borough be!ore and
other managers have not been in!ormed o! "laras decision to introduce this
techni&ue. Be!ore she moved to her current post "lara was aware that many managers
were critical o! the !inancial in!ormation they received but they were also reluctant to
try techni&ues such as activity based costing. (anagers in the Borough have described
activity based costing as a techni&ue that is only suitable to other sectors or criticised
the comple)ity o! the techni&ue. "lara is hoping to demonstrate that the %snapshot
approach is worthwhile.

"lara decided that about # to * activities need to be identi!ied to give the sta!! a good
understanding o! the $ey activities in the department. The possibility o! identi!ying
20+,0 activities was considered but this was re-ected because there was very little time
to do the wor$. .or the whole e)ercise it was !elt that the in!ormation must not ta$e
too long to collect and interpret and the %snap shot/ should be repeated regularly.
Activity Analysis
The activities identi!ied by "lara and her sta!! !or the !irst %snapshot are given in
appendi) 0 and the cost drivers are given in appendi) 2. .or the !irst 02 months the
total annual sta!! related cost !or the department is 1200,000 and the estimated total
number o! hours !or all sta!! is *,000. "lara decided to include only sta!! related costs
in her calculations as this represented appro)imately *02 o! total department costs.
3alue+added activities
The chie! e)ecutive has indicated that all managers will have to contribute to a cost
reduction e)ercise in the ne)t # months. No details are yet available but "lara believes
managers will be as$ed to identi!y value+added and non+value added activities !or the
e)ercise.
Appendix 1
Brie! details o! the $ey activities identi!ied "lara and her sta!! are given below:
Activity Brie! description
4e&uests !or in!ormation !rom businesses 'n!ormation pac$s have been prepared !or
telephone en&uiries or letters to standardise
the response to re&uests !or in!ormation.
Additional research may be necessary but
this is not a signi!icant activity.
4e&uest !or in!ormation !rom developers 'n!ormation pac$s are provided giving
details o! labour mar$et, training, !inancial
in!ormation and !urther contacts.
Pro-ect management and development. The department develops and manages a
wide range o! pro-ects including
environmental improvements, seminars,
training pro-ects and -oint venture
developments. There is a lot o! time ta$en
up by preparing reports !or committees.
Policy development A policy contribution includes wor$ !or
di!!erent bodies such as the 5overnment
departments.
6or$ !or other council departments. 't is di!!icult to de!ine a typical re&uest !or
in!ormation but generally each re&uest
involves a similar amount o! activity.
7ther This is time spent on various activities in
the department, which "lara will consider
in more detail in the !uture.
continued .../...
Appendix 2
Details of cost drivers
8stimated percentage o! departments total hours by activity 2
Activity "ost driver 8stimated percentage o!
departments total hours by
activity 2
4e&uests !or in!ormation
!rom businesses
Number o! re&uests !or
in!ormation !rom businesses
20
4e&uest !or in!ormation
!rom developers
Number o! re&uests !or
in!ormation !rom
developers
09
Pro-ect management and
development.
Number o! re&uests !or
"ommittee reports.
,0
Policy development Number o! re&uests !or
policy input.
09
6or$ !or other council
departments.
Number o! re&uests !or
in!ormation or analysis.
#
7ther Number o! hours. 0:
Total 0002
"ost driver + estimated annual 8stimated annual
volume + minimum
8stimated annual
volume + ma)imum
Number o! re&uests !or in!ormation !rom
businesses
0,000 0,200
Number o! re&uests !or in!ormation !rom
developers
::0 #:0
Number o! re&uests !or "ommittee reports. ;0 020
Number o! re&uests !or policy input. 090 0*0
Number o! re&uests !or in!ormation or
analysis.
0;0 290
Number o! hours. 0,200 0,200
continued .../...
Question ne
8valuate the choice o! cost drivers identi!ied by "lara and discuss how the accuracy
o! the costs can be improved.
Question !"o
"lara is hoping to use the in!ormation to compare the per!ormance o! her department
with similar departments nationally and also identi!y potential areas !or cost
reduction. <iscuss.

continued .../...