strategy

Using full cost accounting

Synonyms:
Internalizing complete production costs
Determining full social cost of programmes
Estimating lifetime project costs
Making complete costing
Completing cost projections
Considering lifetime costs of a project
Accounting for overall financial costs
Description:
Environmental and user costs are considered alongside cost of production. Environmental cost is the cost imposed on society through damage to ecosystems and other resources resulting from degradation and pollution. User cost is the value of future resource benefits foregone because they have been reduced by current use.
Context:
Many production costs of goods and services are ignored in the process of calculating the price to the user. In general only direct costs to the producer are factored in while other costs to society or the user are "externalized", for example: air pollution costs of motor cars; cost of safe disposal of indestructible or toxic consumer goods; operating costs of a gravel pit used not to take into account the downstream damage to the river and restoration of the land once mining was completed.

One way spending agencies try to preserve or enlarge their claims on the central budget is to submit a funding request for only the first phase of a large project without specifying what later phases will cost. Because projects are difficult to cancel once begun, the best way to avoid ballooning costs is to require that no project begin without a full picture of projected future costs. "Costs" include not merely capital costs but all recurrent resources needed to complete and operate the project. The recurrent cost implications of investment decisions are often understated or overlooked. This may be because recurrent and development budgets are drawn up by separate processes, even by different groups of people, with little or no account taken of their complementarities. The problem can also be one of inadequate information. Country-specific norms, established through empirical investigation of ongoing projects, can be useful as a rough guide in forecasting recurrent costs.

Implementation:
This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities.

Botswana's planning and budgeting system is an example of attention to the recurrent cost implications of investment spending. In preparing the the sixth National Development Plan (covering fiscal 1985-86 to 1990-91), each sector ministry was asked to list the programmes it needed to carry out its sector policies, presenting them in summary form with a brief description of each project, its purpose and its cost in both capital and recurrent expenditure. The investment ceilings were then determined from the overall targeted growth of recurrent spending, itself reflecting ceilings for use of skilled employees. The historical relation between recurrent and capital spending was an additional guide. Investment in excess of ceilings was allowed only if a ministry could demonstrate that such investments would require no further allocations from the recurrent budget.

Subjects:
Social
Finance
Accounting
Purchasing, supplying
Production
Future
Type Classification:
C: Cross-sectoral strategies