Mongolia Output Costing and Budgeting-Tarun Das

Output Budgeting – Tarun Das
Output Costing and Output Budgeting –

Basic Concepts and Methodology
Prof. Tarun Das1, Ph.D.
Government of Mongolia
Ministry of Finance
30 September 2007
________________________________________________________________
1
Glocoms Inc. (USA) Strategic Planning Expert, ADB Capacity Building Project on
Governance Reforms. For any clarifications contact das.tarun@hotmail.com.
Glocoms Inc. (USA) MOF, Govt. of Mongolia

Output Costing and Output Budgeting –

Basic Concepts and Methodology
Prof. Tarun Das, Ph.D.
CONTENTS
1. Current Status of Budgeting System in Mongolia

2. Requirements for Moving to Output Budgeting
3. Recommendations and Desired Action Plan
4. Benefits of Output Budgeting and An Overview

4.1 Role of output budgeting in Public Administration of Mongolia
4.2 An overview of output costing and output budgeting
4.3 Upgrading infrastructure for costing and budgeting
5. Costing Framework- Basic Concepts and Principles

5.1 What is output budgeting?
5.2 What is output costing?
5.3 Objectives, purpose and benefits of output budgeting
5.4 Cost accumulation and General Ledger (GL) Costing
5.5 Cost objects
5.6 Cost classification
5.7 Total costs
5.8 Cost drivers
5.9 Costing Methods
5.10Activity Based Costing (ABC)
6. Output Costing Methodology

6.1 Step-1: Specification of outputs
6.2 Step-2: Identification and information on costs
6.3 Step-3: Assignment of direct costs
6.4 Step-4: Allocation of indirect costs
6.5 Step-5: Appropriate costing methodology
6.6 Step-6: Accrual output budgeting (AOB)
6.7 Cost allocation- an example
6.8 A case study for output costing
6.9 A Case Study for Costing Govt Services
Selected References
Appendix- Glossary

1. Current Status of Budgeting Systems in Mongolia
1.1 Budget Planning
Current Situation
The current budget planning arrangements in Mongolia are comprehensive in

coverage. Public Sector Management and Finance Act (27 June 2002) of
Mongolia mandates that “Strategic Business Plan of a budgetary body shall form
the basis for preparation and approval of its budget. The SBP shall contain
strategic objectives of the budgetary body for the forthcoming three years and
the outputs to be delivered during the next financial year and specified by
category, quantity, quality and costs. The SBP must prepare projected financial
statements on the basis of the same indicators as the budgetary body’s annual
report.”2 The PSMFA also mandates that costs should be based on accrual
accounting.
Thus, as per the requirements under the PSMFA (2002) annual budgets are
based on multi-year Strategic Business Plans (SBPs) for the HQ and the
agencies under the line ministries. However, they suffer from the following
shortcomings:
(a) There is not proper output budgeting, and there is focus more on the
input costs than the expected outputs.
(b) There is no prioritization of programs and outputs.
(c) In-year reallocations are largely driven by relative cash demands.
(d) There is little consideration of service delivery performance in the
budget process or within year.
Actions required
It is necessary to establish a more output and outcome oriented approach to

budgeting, and to specify a framework for outcomes and outputs for the top
management so that they can easily identify and monitor outputs without
bothering too much about precise details of inputs to be used. An outcomes and
outputs framework also allows line and field managers to know what is expected
of them.
A focus on outputs simplifies the projection of forward estimates by avoiding the

need to focus heavily on input requirements, which can be derived from output
targets. It makes it easier to see how outputs and resource requirements will
change over time in the forward estimates.
2
Article 26.1 and Article 26.2 of the Public Sector Management and Finance Act (27 June 2002).

Output budgets need to be based on reliable estimates of output costs. This

requires establishing a new chart of accounts and an attribution matrix for linking
resources to activities and activities to outputs and outcomes.
As usual there will be negotiations between the MOF and line ministries for
allocation of resources. But under output budgeting, negotiations are more
transparent and based on information on expected outputs rather than on
arbitrary cuts and favors. Departmental budgets are also based on agreed
strategic plans and objectives, and not on wish list of programs and projects.
The outputs and outcomes framework provides a robust basis for block funding
and a consistent basis for multi-year estimates. Block budget allocations can be
designed around output groups to provide greater flexibility to the agencies and
greater certainty and transparency for MOF. For example, there could be block
grants for constructing new hostels for students, and a separate block grant for
scholarship payments.
1.2 Output Costing and Output Budgeting
Current Situation
Presently the HQ of a Ministry adopts a methodology which can be described as

“Output-based” or more accurately “activity-based inputs costing and inputs
budgeting”. The methodology consists of costing of inputs (in terms of personnel,
goods and services, and overheads) required to sustain the activities for
producing the desired outputs. Although outputs are indicated in the SBP,
budgeting is done on the basis for inputs. On the other hand, under output
budgeting the cost and budget estimates are provided for each output (and the
input costs used for estimation of outputs are not shown in the budget).
But the basic purpose of output budgeting, as required under the PSMFA (2002)
is that given the budgeted cost, one should be interested in the achievement of
output and outcome (and not in costs for labor, goods and other services). Once
we monitor output costs, the input costs are automatically monitored. But if we
simply monitor input costs, we would not know what happened to the output
levels.
Actions required
An effective and comprehensive costing system is essential to output based

management. The system requires detailed information and constant recording
of actual expenses against activities. It generally requires a computer based
system of costing linked to the chart of accounts. This would necessitate a
substantial investment for buying high-speed computers and software packages
and the commitment of staff to ensure the regular updating and accuracy of
records on a daily basis.

It is reasonable to introduce a simpler costing system initially and then to move to

full activity based costing in the future. Initially costing and budgeting may be
done on cash basis, and costing of accrual expenses should not be considered
until the movement to accrual accounting and budgeting system has been fully
tested and completed. In the initial phase it might be better to exclude major
capital expenditure from the output costs, but at the second phase it is desirable
to include capital costs and depreciation as a part of total cost.
Major requirements for an output costing system include the identification of the
following items:
♦ Outcomes, outputs and activities,

♦ Resources used in terms of direct and indirect costs,
♦ Relationship between resources and activities, including main cost drivers,
♦ Attribution matrix for attributing resource costs to activity costs, and then
activity costs to output costs and contribution to outcomes (linking output
costs to outcomes could be optional in the initial phase),
♦ A new chart of accounts that links revenues and expenses to activities,
outputs and outcomes,
♦ Agreement on the costing framework.
2. Requirements for Moving to Output Budgeting
A. Move towards Output Costing and Output Budgeting by the line

ministries and agencies require the following steps:
1. To establish an integrated planning, costing, budgeting and reporting

framework containing outcome, output, activities, inputs, performance
and evaluation parameters. The task would include the following
measures:
(a) Preparation of Strategic Business Plans with specification of the

Portfolio Ministry’s outputs and outcomes;
(b) Specification of performance indicators for measurement of quality,
quantity and cost of outputs and outcomes; performance indicators
should be “clear, relevant, economic, adequate and monitorable”
(CREAM).
(c) Specification of appropriate indicators for monitoring the contribution of
outputs to their desired outcomes; and
(d) Evaluation of the performance of the previous SBP.
2. To establish a comprehensive costing framework that links the

resources used with activities, outputs and outcomes. This will require

the design and implementation of a new chart of accounts, with codes for
activities, outputs and outcomes, and an attribution matrix for recording all
direct and indirect costs to the appropriate items or to the General Ledger.
This could be achieved in a phased manner. Initially there may be
reporting of direct costs plus broad allocation of indirect costs until a more
precise costing framework is established through a new chart of accounts
and more accurate measurement of actual costs for all activities leading to
outputs.
3. To prepare annual output budgets as a part of the Portfolio Budget, and

actual results compared to budget estimates for the previous year. All
these information should be provided in the same set of documents as
financial statements.
4. To strengthen the internal audit service to include performance

audits along with normal financial and compliance audits.
5. Ideally, a fully automated financial accounting and reporting system need

to be developed. If a new financial accounting system is fully
implemented, initial processing of data may be assigned to individual cost
centres, subject to proper training, and documentation of procedures and
establishment of cross validation arrangements.
6. A proper risk management system also needs to be developed to take

care of accounting risk, political risk, operational risks and systems
failures.
7. There are a number of areas where the central agencies need to change
requirements for line agencies to reduce the burden of compliance, allow
greater internal administrative efficiency and improve transparency and
accountability. These include the following:
(a) To develop a clear and uniform framework for government

budget planning for individual agencies. The framework should
explain how budgets will be prepared and negotiated, what
transactions to be covered, and how performance will be
measured, monitored and reported. Without this framework there is
a risk that agencies may develop practices that are not uniform and
consistent with each other and thereby create undue complexity
and confusion in the budget for both parliament and the public.
(b) Central asset reporting arrangements may be reviewed to focus

on major assets only and should adopt good practices on asset
management. Assets will be included in financial reporting as part
of accrual reporting.

3: Recommendations and Desired Action Plan
1. Budget Planning
1.1 MOF should develop a new budget framework based on outcomes,

outputs, activities, inputs and performance parameters to measure
quantity, quality and timeliness of outputs and outcomes.
1.2 Budget should provide estimated expenditure for the previous year, and
forward estimates for the budget year and three forward years using the
budget outcomes and outputs framework.
1.3 A Strategic Business Plan should be prepared indicating priorities for the
budget year and three forward years.
1.4 Information on relevant recent performance (e.g. last full year and year to
date) should be given for comparisons and to optimize efficiency and
effectiveness.
1.5 Budgets for agencies should indicate the responsibilities of each unit for
executing outputs and outcomes. Individual performance agreements for
managers should refer to the outputs they are responsible for producing
or contributing to.
1.6 A new budget preparation and approval cycle should be established that
allows explicit consideration of reliable information on financial and non-
financial performance during at least first three quarters (i.e. January-
September) of the current year prior to deciding the allocation of
resources for the budget year and three forward years.
1.7 A new chart of accounts should be established that links revenues and
expenses to activities, outputs and outcomes. This should be
underpinned by an activity based cost attribution model.
1.8 The role of Accounting and Audit Divisions in recording, maintaining and
reporting financial accounts and the systems coordination should be
strengthened.
1.9 There will be greater responsibility and accountability for operations
managers to ensure efficient and effective use of resources. It can be
achieved by specifying performance parameters on outputs and
outcomes at the operational level in addition to more accurate costing
information for each activity and output.
1.10MOF should provide estimates of budgetary resources, allocations for all
portfolio ministries for the budget year and three forward estimates as
early as possible, so that line ministries can prepare comprehensive
strategic plans.
2. Output Costing and Output Budgeting
2.1 There is a need to move to an output and outcome budgeting and

planning framework to facilitate use of outputs and outcomes instead of
inputs as the basis of priority setting.

1. Budget Planning

2.2 The new framework should include a system for monitoring and reporting
cost information on a timely and accurate basis. Ideally the system should
be fully computer based to improve speed and efficiency.
2.3 A new costing system should be developed within an outcome and output
framework, linked to an attribution matrix for activities and resources.
2.4 Costs will include both direct and indirect costs (including maintenance
costs), but major capital costs (i.e. depreciation and capital charges) may
be excluded from calculations until the accrual accounting and budgeting
system is fully developed and tested. There should be some attempts to
measure depreciation and attribute it to outputs in the second phase of
the new costing system.
2.5 Specification of outputs should include definition of quantity and quality so
that unit costs can be measured where it is practical to do so.
2.6 There should be specific staff with responsibility for maintaining and
analyzing cost data as part of their duties. This should also be a priority
area to be monitored by internal audit.
2.7 Cost information should be a major element of reporting on outputs.
When accurate cost data is produced on a uniform basis for a number of
years or for alternative providers, agencies should consider providing
benchmarks for costing goods and services.
3. New Accounting Heads and Codes
3.1 There is a need to develop a new chart of accounts to facilitate

movement to output budgeting and accrual accounting. The chart of
accounts should include coding to facilitate attribution of costs to
activities, outputs and outcomes.
3.2 Purchase of a standard software package for Financial Management
Information System (FMIS) may help to automate many of the
processes for entry, checking, verification and authorization of
transactions. This may be examined by the IT experts engaged in
developing the Budget Process Information System (BPIS).
3.3 Selection of a new FMIS also provides the checklist of standards
required for accounting platforms.
3.4 Some changes to existing procedures and standards may be required to
be made if there is a move to a new FMIS and accrual accounting and

1. Budget Planning

reporting.
4. Financial and Performance Reporting
4.1 Outputs and outcomes need to be defined and specified clearly.

Performance measures and indicators need to be developed for
monitoring outputs and outcomes.
4.2 Senior management should support the move to an outcomes and
outputs framework and participate in design and specification of the
outputs and outcomes.
4.3 Reporting to senior managers should be streamlined to reduce the
amount of details and provide information at a higher level of
aggregation. Emphasis should be placed on improving accuracy and
timeliness of information.
4.4 Procedures continue to be applied for ensuring consistency of reporting
across agencies and line ministries.
5. Asset Management
5.1 Changes are required to be made in the register for asset management
as part of the move to multi-year budgeting, accrual accounting and
reporting.
5.2 The asset register should be maintained, retained and expanded to
record initial value, current value, depreciation and cost attribution of
each asset.
5.3 The cost of assets (comprising depreciation and capital charges) for
each output should be identified and attributed accordingly.
5.4 Managers should be aware of the role of cost of assets as part of their
total production costs.
5.5 HQ of the line ministry should continue to analyze lease or buy or sale
options as part of asset management decision making. This may include
consideration of insourcing, outsourcing, sale and purchaser/ provider
options.
6. Internal Audit
6.1 Internal audit and accounting systems need to be strengthened after

1. Budget Planning

examining whether there are sufficient resources and skills to undertake
the required works relating to output costing, output budgeting and
accrual accounting.
6.2 It needs to be ensured that the accounting and auditing staff have
adequate qualifications, skills, knowledge and experience. There should
be a system of continual capacity building and proper succession plan.
As these works generally require higher highly technical persons, which
are not only scarce but highly competitive, there may be need for
flexible or negotiable salary scales for these personnel.
6.3 Ministry of Finance may prepare regulations and procedures on the role
and functions of various audit authorities.
6.4 There should be close alignment between the accounting and auditing
staff to address issues relating to performance and systems integrity in
addition to standard financial and compliance audits. This can be
achievable only when objectives, outcomes and outputs are more
clearly specified and costed.
6.5 Performance indicators for the audit unit should be reviewed to ensure
that they provide an adequate and balanced assessment of
performance.

4. Benefits of Output Budgeting and An Overview
4.1 Role of output budgeting in Public Administration of Mongolia
The Government of Mongolia is implementing a set of governance reforms which

consist of a collective package of strategic business planning, output budgeting
and accrual accounting. The Government will fund agencies for the efficient
accrual cost of an agreed set of outputs to be delivered to the government and to
the people, under agreed performance standards. Consequently, the agencies
are required to cost all of their outputs as the basis for budget allocation. The
accurate costing of outputs is vital for strategic planning, output budgeting and
performance evaluation.
There are a number of other reasons for costing outputs, which include the
following:
• To identify the nature, quantity and quality of outputs that can be produced
within the Government’s fiscal limits;
• To identify strategies to reduce costs; for example, to eliminate or privatize
non-essential or non-value-adding activities;
• To monitor performance of each activity;
• To project the future costs of outputs for the medium term;
• To renegotiate the quantity of the outputs to ensure budget constraints;
4.2 An overview of output costing and output budgeting
There are seven key steps for the implementation of output costing and output
budgeting for an agency. These include the following
(a) Determine the outputs to be budgeted

(b) Define the required costing structure.
(c) Review the existing costing systems.
(d) Select costing methods and techniques.
(e) Design costing system changes.
(f) Cost outputs and prepare reports.
(g) Use the output costing information.
Step 1 – Determine the outputs to be costed and budgeted
The first step in any costing exercise is to identify the relevant Cost Objects. A
Cost Object is anything for which a separate measurement of cost is required.
Under output budgeting, the Cost Objects can be a cost centre, an output class,
an output, a sub-output or an activity that an agency is expected to deliver under
the Strategic Business Plan endorsed by the government. These outputs will be

funded by the Government and the Agencies are required to cost these outputs
as a basis for their budget allocation.
Step 2 – Define the Required Costing Structure
Agencies have to define the appropriate type of costing structure for their needs.
The structure depends on the following factors:
• The purpose of the system
• The costs to be assigned through the system
• The existing cost structure.
The Purpose of the Costing System and Framework
The level and purpose of the costing system should be pre-determined and well
documented. If the purpose is simply to cost outputs or a group of outputs at the
highest level, then a simple method of costing is sufficient. If, on the other hand,
the purpose is to provide management with detailed information about costs at all
activity levels required to deliver the output for improved decision-making, then a
more complex structure of costing is required. This is called Activity Based
Costing (ABC). Then, a clear and detailed output costing framework needs to be
prepared as the basis for the design of output budgeting. Before proceeding to
the next stage, senior management should approve this statement.
The Costs to be assigned through the Costing System
In order to arrive at the fully costed outputs, the total costs of the agency must be
relevant, accrual based and fully attributed.
The Existing Cost Structure
The existing cost structure should be examined to ensure that the cost elements
meet these criteria.
Step 3 – Review the Existing Costing System
Next step is to carry out a review of the existing costing systems and capabilities
within the agency with a view to utilize the existing system where appropriate,
and to make improvements and corrections where necessary. The basic purpose
is to keep the implementation cost of output costing as minimum as possible; and
to avoid frequent and unnecessary changes. The review should also take into
account systems changes so as to take benefits of improved cost management
and to make the output budgeting consistent with systems development.

Step 4 – Select Costing Methods and Techniques
By this stage, agencies have a good understanding of their existing cost

collection and assignment systems and they know how they would meet
requirements for output budgeting. It is now necessary to devise ways to bridge
the gaps between the existing systems and the output budgeting needs by the
Ministry of Finance. The Government’s requirement is that an agency’s costing
methods must provide an accurate estimate of the total cost of delivering each
output. When upgrading the system and determining accuracy and
reasonableness a cost/benefit tests should be carried out by an agency. In larger
agencies, it may be appropriate to use a variety of costing methods including
Activity Based Costing (ABC). An ABC system assigns costs among the
underlying cost-drivers on the basis of cause-and-effect rather than on an
arbitrary pro-rata basis.
Step 5 – Design Costing System Changes
Necessary changes in the existing costing system may be designed for collection
and assignment of the costs according to the costing methods selected. The
choice of data collection and assignment tools depend upon:
• the existing system;
• the results of a cost-benefits analysis of introducing new costing systems;
and
• The availability of financial resources and technical manpower to
implement and operate new costing systems.
Step 6 – Cost Outputs and Prepare Reports
Agencies cost their budgeted outputs on the basis of selected costing structure,
system and methods. Agencies should also prepare an annual report that
includes the total cost incurred in delivering each of their outputs.
Step 7 – Use the Output Costing Information
Output costing can deliver vital information to management for effective decision
making. It can provide information on:
• cost of outputs for budget submissions;
• required changes to the funding of outputs;
• actors responsible for variances between budgeted and actual costs;
• value-adding activities;
• how processes can be changed to make the agency more effective and
efficient;
• How the agency can improve service delivery within given resources.

4.3 Upgrading Infrastructure
The implementation of output costing becomes successful in an agency only if

senior management is committed to its introduction and key personnel are
actively involved in the process. However, the following steps need to be taken
for its successful implementation:
• Changes associated with output costing in an agency should be

introduced in a phased, progressive, and manageable way.
• Staff should be trained and briefed on the basic concepts and
methodology for output costing and output budgeting.
• Detailed guidelines with explanations and examples need to be prepared
and given to the staff indicating how to identify activities and outputs and
to link these to inputs and costs.
• The benefits of the system should be explained to staff in addition to
giving them opportunities to raise questions and concerns and to indicate
constraints.
• Skills need to be developed to interpret the information produced by the
costing system.
• Variances between actual and budget output costs need to be accounted
for.
5. Costing Framework- Basic Concepts and Principles
5.1 What is output budgeting?
The concept and scope of output budgeting have been described in detail in the
report on strategic business plans3. In brief, under output budgeting the cost and
budget estimates are provided for each output (and the costs of separate inputs
like man, materials, machines etc. are not shown separately in the budget). The
basic purpose of output budgeting is that given the budgeted cost, one should be
interested in the achievement of output and outcome (and not in costs for labor,
goods and other services). Once one monitors output costs, the input costs are
automatically monitored. But if one simply monitors input costs, one would not
know what happened to the output levels. Thus, under output budgeting, there
are output heads for both accounting and auditing.
Under output costing and output budgeting, an identified output becomes a cost
centre as well as a budget centre, so that the cost of that output can be
estimated, budgeted, monitored, and evaluated. If single output cannot be
3
“Preparation of Strategic Business Plans- General Guidelines, Some Suggestions for
Improvement, and Summary of Recommendations” by Tarun Das and E. Sandagdorj, Ministry of
Finance, August 2007.

budgeted, then related outputs can form an output group and the cost and
budget centre. The Departments and Agencies who are responsible for delivering
the output are identified and specified in the Budget.
For operational purpose, it is more convenient to realign outputs with

departments/ divisions or to make a one-to-one correspondence between outputs
and departments/ divisions. In other words, at the first phase, each department/
division can become a cost and budget centre. At a later stage, when the system
is developed properly, the specific outputs can also become cost centres.
5.2 What is output costing?
Costing is the way by which an agency financially measures the resources

consumed in transforming inputs into outputs. Costing is completed through two
broad phases:
1. Cost collection - gathering of costs in an organised way using an accounting

system.
2. Cost assignment - the assignment of a cost or group of costs to one or more

outputs.
A good costing system enables an agency to answer the following questions:

• What is the cost of particular products/services?
• What is the cost of various activities?
• What are the drivers of costs?
• What opportunities exist for an agency to rationalize costs and to improve
efficiency?
Whilst there are many different costing methods, all are designed to describe the
two primary functions of cost collection and cost assignment. In its simplest form,
the diagram below illustrates the basic process, or generic method, of costing.
Output costing is a
process of determining the
total cost of each product
or service (output)
produced by an agency for
the purpose of negotiating
funding under the Budget
allocations. Agencies may

also use output costing for fixing the prices of goods and services sold by them to
the third parties.
A key step in costing outputs is the identification of the relevant costs incurred;
i.e. the cost of the resources consumed in producing the outputs. The total cost
includes all direct and overhead cash costs and accrued costs for the period.
Direct costs are the cost of resources consumed that can be traced directly to the
Cost Object. Direct costs are generally made up of direct materials and direct
labour. All costs that are not direct costs are overhead/indirect costs.
Initially, an output costing system may be focused only at an output level, which
requires only broad cost assignment and therefore minimizes the complexity of
the costing system. However, it is likely that none of the activities or processes
carried out to produce the outputs is costed. This may not be very beneficial for
internal budgeting and management control. So, when the system of output
costing develops over a few years, a more detailed costing system on the basis
of Activity Based Costing (ABS) may be developed. Finally, an agency’s costing
system must be well documented to ensure that it can be audited and is robust
enough to generate public debate.
A key component of the output costing is that agency outputs will be costed on
an accrual basis. Major requirements of output costing include the following:
1. Output costs must be calculated on the basis of the accrued costs of all
resources (direct and overhead) consumed in the production of the outputs.
2. The total cost must include all the relevant costs. This does not include
competitive neutrality adjustments.
3. Total cost must include an appropriate share of the agency’s total overhead
costs including executive management and corporate services.
4. All resources consumed directly by an output must be assigned to that output.

All resources consumed that cannot be traced directly to an output should be
assigned to the output using an allocation technique.
5. Agencies must make a cost/benefit trade-off when determining the particular

costing systems. In other words, the expected additional benefits of the costing
system must exceed the additional costs of implementing and maintaining the
system.
5.3 Objectives, purpose and benefits of output budgeting

The output costing produces a number of benefits to both the agency and the
Government. Better costing information enables agencies to improve output
planning, budgeting and operational efficiency. Most benefits result from the
improved reliability and availability of cost information for decision-making. The
information of the total cost of each output by agencies helps the Government to
determine an appropriate mix of outputs that can be achieved within available
fiscal limits. The following benefits accrue to the agencies:
• More information is available for optimal allocation of resources;

• A broader range of information is available for better decision-making, for
example: comparison and benchmarking of the total cost of outputs with
alternative suppliers; identification of inefficiencies which allows to take
appropriate steps for cost reduction; a better understanding of the cost
drivers
• Agencies have a more appropriate basis for preparation of internal
budgets.
• Access to more accurate information assists agencies to determine the
selling prices of goods and services provided to the third parties on a cost-
plus principle.
• Cross-subsidies become more transparent. Accurate costing identifies
cases where some outputs are being over-funded at the expense of other
outputs.
5.4 Cost accumulation and General Ledger (GL) Costing
Prior to the output costing, agencies collect their costs under cost centre codes
within the general ledger. In the Government sector, this is commonly termed as
‘general ledger costing’. This technique requires cost data to be collected from
source documents and processed through the accounting system into the
general ledger. All costs incurred during a period are recoded and accumulated
against relevant general ledger accounts according to a cost centre structure
defined by the chart of accounts. Depending on the nature of the item, certain
costs may not be able to be posted to a single account. Accordingly, the cost may
be distributed across a number of general ledger accounts.
Output costing recognizes that inputs are transformed into outputs through a
series of events. These events generally require separate identification and
costing. In most cases, this would be too cumbersome to be handled in the
general ledger. Internal charging is a variation on the general ledger costing
method. Costs are accumulated and charged to cost centres on a user-pays
basis at specific rates.
The complexity of cost modules in government departments and public agencies

varies from simple stand-alone spread sheet to an integrated system that links
the cost schedules to the general ledger and various output groups.

Chart of the accounts should be consistent with cost classifications and should
include departmental heads. The budgetary bodies can add 2 digits after last 2
digits of expense accounts in the chart of accounts to identify cost centres
expenses. For instance, salaries account has 6 digits. First 2 digits are code of
expense account, next 2 digits illustrate salaries account and last 2 digits can
illustrate the department of division’s code. When calculating the cost of outputs,
it will be easy to know the departmental salaries and to assign them to specific
output heads.
5.5 Cost objects
Cost objects are the elements which need to be costed by the agencies for the
purpose of output budgeting. Cost objects could be outputs, group of outputs or
activities. The choice of cost objects determines the degree of complexity of the
costing system and methodology and the operating cost of the system. While
making trade-off between complexity and operational cost, agencies need to
emphasize accuracy and timeliness of information and the risk of cross-
subsidizing some outputs.
For external reporting, agencies report cost information at the output level. For
internal purposes, agencies may like to report costs at sub-output and activity
levels, basic cost centres and major geographic regions.
5.6 Cost classification
Costs may be classified in various ways. For example, costs can be classifies as
fixed and variable costs. Fixed costs remain unchanged with variations of output
volumes in the short run, while variable costs change when quantity of output
changes.
Costs can be classified according to the production function as either output

costs or non-output costs. For decision making, costs may be classified as
controllable or uncontrollable by management. For example, employer’s
contributions to the social insurance funds for the employees are decided by
existing laws and are unavoidable.
Costs can also be classified as incremental costs, sunk costs and opportunity
costs. Incremental costs could be avoided if production plan is dropped. But,
sunk costs are those costs, which have been either made or committed, cannot
be avoided and are irrelevant for future financial decisions.
For the purpose of output budgeting, costs are classified into direct and indirect
costs depending on the manner in which costs are consumed by outputs,
activities or cost centres. Identifying as many as resources as direct costs helps
in improving the accuracy and relevance of output costing and output budgeting:

Direct costs
Direct costs are those costs which can be directly attributed to an output. They
are mostly variable costs and vary in direct proportion to changes in the volume
of output or the level of activity.
In the public sector, where labor is the dominant factor, direct costs are divided
into direct staffing cost and other direct costs (e.g. direct material costs). Direct
staffing costs include not only wages and salaries but also other compensation to
labor such as superannuation, workers’ compensation insurance, leave travel,
uniforms, and payment of payroll tax, if any.
Direct staffing cost is easily identified when the whole or part of the
organisational unit engaged in producing an output is considered as a cost
centre. Other direct costs, such as other material costs, are those which can be
easily identified as being directly related to an output.
As regards staffing cost, the following factors should be included if applicable and
material:
1• base wage or salary
2• overtime
3• shift loading
4• leave loading
5• superannuation
6• severance benefits
7• other allowance (e.g. on-call allowance)
• travel expenses
1• uniforms
2• training
3• protective clothing
4• payroll tax (see discussion on taxes)
5• workers’ compensation insurance premium
6• fringe benefits tax
7• housing
8• office accommodation
9• power
10• equipment (including computer equipment)
11• stationary
12• other office consumables
Some of these factors require additional explanation as given in Table-1:
Table-1: Different Components of Staff Expenditure

Overtime: Only include the employee’s overtime associated

with the activity being costed (if the employee(s)
works on more than one activity).
Shift Loading: Ensure that the shift penalties reflect the staffing
roster which is being proposed for the activity.
Leave Loading: Include accrued as well as cash costs.
Superannuation: Government employees may be members of the

Retirement Benefits Fund Scheme, or they may elect
to contribute to some other complying
superannuation funds such as Provident Funds,
Pension Funds and Insurance Funds. The
superannuation expense should include the
employer amount paid; including any additional
Gratuity and Pension contributions to Treasury, but
this will not include any payments of pensions to the
pensioners (who have already retired) as this would
not constitute part of the cost of services of the
current staff.
Travel Expenses: Include all relevant expenses, especially allowance

payable under award provisions.
Training: Training information may be available from data

collected for other purposes. However, the costs
included would need to exclude the costs attributed
to the wages and salaries paid to staff while they are
attending training courses.
Housing: If housing is provided through the Government, then

the cost included in the analysis should be an
estimation of the net cost to government of providing
the housing (i.e. net of rent paid by the staff but
inclusive of the annualized cost to government,
based on full market rent analysis, of having the
Government provide the house).
Source: Costing Fees and Charges: Guidelines for Use by Agencies, Australian Treasury,
December 2006

Indirect costs
For some costs, it may not be possible to establish direct relationships with the
cost objects, because they are common to more than one output. These are
called indirect costs, and sometimes referred as overheads. For example,
indirect costs can include the salary of the Head of the Agency, corporate office
and general administration costs, the cost of personnel and finance services and
the cost of office accommodation. These costs are assigned to different outputs
on the basis of their contributions to the output cost.
Other expenses or non-output costs
An agency may incur costs that are unrelated to outputs. For example, there
could be costs due to abnormal restructuring, abnormal write-off of assets, and
extra-ordinary costs. These costs are regarded as non-output costs and excluded
from the output costing exercise.
Direct Costs Mostly variable Little fixed

Indirect Costs Some variable More fixed
Capital Costs Little variable Mostly fixed
Capital Costs
There are two aspects relating to the use of assets which must be considered in
any analysis of cost:
1• the determination of an appropriate depreciation charge; and
2• Recognition that the funds invested in the assets have alternative uses and
therefore some allowance should be made for a rate of return on those assets
(also known as the opportunity cost of capital).
Asset Depreciation
Two common methods of determining the depreciation charge are:
1• the prime cost or straight line method which allocates the cost of the asset
over the number of years of useful life; and
2• The diminishing value method which allocates a higher proportion of the cost
of the asset to the earlier years of its life.
A depreciation charge is not relevant in all circumstances. For example, where
agencies purchase equipment, receive an input tax credit, hold the equipment for
a relatively short period of time and sell it at a price close to the original purchase
price, there is no need for a depreciation charge.

The valuation of the assets employed is an important matter because the

valuation has such a significant impact on the depreciation charge. Asset
valuation policies need to be formulated before estimating depreciation or capital
charges.
Opportunity Cost of Capital

Estimation of capital charge is very difficult and complex. As a thumb rule, the
Australian Treasury4 recommends that the Tascorp long term borrowing rate
(around 2 per cent) be used as the central estimate for the cost of capital for
funds invested in agency assets.
To calculate the required return on assets, Australian Treasury has derived the
following formula:
cost of total estimated replacement the interest

capital value or current cost portion of any
(%) x equivalent of assets less relevant debt
employed less accumulated servicing cost
depreciation
The cost of capital is applied to an agency’s total non-current asset base, with an
allowance deducted for the interest portion of any relevant debt servicing costs.
This approach avoids a double impost for any agencies meeting interest
payments on funds borrowed for asset related purposes.
5.7 Total Costs
The full cost of an Output is the aggregation of direct, indirect and capital costs.
Most of these costs are attributable to agencies. However, some costs may be
met by other agencies. Some costs are based on cash transactions, while others
represent the future call on expenditure (e.g. accrued pension benefits). The
estimation of the cost of an Output should be only the first step in the analysis of
costs. At the end of an accounting period, actual results should be compared with
the estimates of cost as part of a process of continually improving costing
procedures. The Table-2 below provides a summary of various costs.
4
Costing Fees and Charges: Guidelines for Use by Agencies, Australian Treasury, December 2006.

BOX-1:
TYPES OF COSTS
Direct Costs
Staffing costs (including on-costs such as training and travel)
Base wage or salary Overtime
Shift loading Leave loading
Superannuation Retirement/severance benefits
Other allowances (e.g. on-call allowance) Travel expenses
Uniforms Training
Protective clothing Payroll tax (see discussions on taxes)
Workers’ compensation insurance premium Fringe benefits tax
Housing Power
Office accommodation Stationary
Equipment (including computer equipment) Other office consumables
Consumable supplies Maintenance
Office Equipment
Indirect Costs
Includes corporate services costs
Capital Costs
Depreciation
Opportunity cost of capital
Taxation
Commonwealth
State
Local Government
Services and Resources provided free of charge
Property management services
Legal services
Telephone and communication services
Source: Costing Fees and Charges: Guidelines for Use by Agencies, Australian Treasury,
December 2006
5.8 Cost drivers
Cost drivers are those activities, events or factors that trigger or have a strong
correlation to the total cost being allocated. Identification of cost drivers makes
the allocation of costs to outputs easier and more accurate. A simple example is
the allocation of rental and clearing costs to a range of outputs. A cost driver for
this will be the ratio of floor space occupied by each work group to the total floor
area. Table-1 illustrates the relation between cost items, cost groupings and cost
drivers.

Table-1: Relation between cost items, cost groups and cost drivers
General Ledger (GL) Cost Grouping Allocation Method

Cost Items and Cost Driver
Office accommodation Employees/ staff Resource usage analysis
rentals (Floor area used)
Salaries and wages Employees/ staff Activity analysis (Person
hours)
Medical expenses Employees/ staff Activity analysis (Time

consumption)
Travel Employees/ staff Activity analysis (Time

consumption)
Telephones, and Communications Resource usage analysis

communications lines (Transfer pricing system)
Stationary Consumables Resource usage analysis
Equipment maintenance Equipment Resource usage analysis
Software licenses Softwares Resource usage analysis
Depreciation Depreciation Resource usage analysis
Motor vehicles expenses Overhead Allocation to overhead
Equipment rental Equipment Resource usage analysis
5.9 Costing Methods
A costing method defines the process that is used to trace all relevant costs and
attribute them to outputs. In order to determine the cost of its outputs, an agency
will establish a costing system that may use a variety of costing methods,
techniques and tools. There are two main types of costing methods:
• Job Costing;
• Process Costing.
These main methods are often used in conjunction with refinements and other
techniques such as Activity Based Costing (ABC) or Standard Costing.

Job Costing : Job Costing is usually used by organisations that produce unique
products or special order products, where each unique product or service
consumes a different amount of direct material, direct labour and overhead costs.
Job Costing may also be used on jobs that are significant in size and have
distinct start and finish times. Examples of non-manufacturing entities that
regularly use the Job Costing method are:
• Appliance repairers
• Main Roads engineering jobs
• School repair orders
• Auto repairers
• Doctors and dentists
• Accountants
• Universities.
.
Process Costing: Process Costing is the method of assigning costs to the
products/ services resulting from the mass production of like units through a
sequence of several processes. Under this method it is the production process
that is costed, not the specific jobs or units produced. Under Process Costing,
costs are accumulated for a period of time. Individual units are not separately
costed. In order to obtain an average unit cost, the total cost for the period is
divided by the number of units produced during that period. Process Costing can
be used in both a manufacturing or non-manufacturing environment.
Job Costing and Process Costing
The main distinction between process and Job Costing is the number of units
being produced. Job Costing is generally appropriate when the number of units is
small, the units are not homogeneous and the cost per unit is high. Process
Costing is generally undertaken when the number of units is large, the units are
homogeneous and the cost per unit is low.
Which method should be used?
The most important aspect of costing is the understanding of cost behavior

patterns and influences. Consequently, the decision as to which method or
methods an agency might use is influenced by the following factors:
• Size, structure and type of the agency’s operation;

• Agency’s outputs required to be costed;
• Existing costing or accounting systems currently in use;
• Availability of technology and other resources to support a costing system;
• Cost/benefit analysis of alternative methods.

5.10Activity Based Costing (ABC)
ABC is a Process Costing technique that aims to attribute overheads (or joint
costs) to the Cost Centres based on some norms rather than on some arbitrary
allocation basis. ABC assigns the costs to activities on the basis of resources
consumed by the activities. The activity costs are reassigned to outputs using
cost-drivers based on the amount of the activity used by the outputs. In many
circumstances, ABC provides meaningful costing data and information.
Accordingly, its use by agencies should be encouraged.
ABC has the following potential benefits:
• more meaningful costing of outputs as overheads are included in total

costs;
• more effective cost management through improved information about the
• cost of activities undertaken
• to produce an agency’s outputs;
• process improvement through benchmarking the cost of activities against
other providers and industry ‘Best Practices’; and
• increased public accountability for resource consumption;
• improved cost management due to regular analysis and monitoring of the
cost of activities;
• improved customer service by providing activity information that can
contribute to improved service levels or improved service quality;
• improved cost modeling by allowing changes in activities;
• Better ability to align activities to organisational units and therefore assist
in internal budget allocation.
The ABC Process
The implementation of an ABC system can be best described by the following six
steps:
1. Identify the agency’s activities. Activities are the works performed to
produce outputs;
2. Identify the cost of input that will be consumed by the direct and indirect
activities. Direct activities are those activities that can be traced directly to a
Cost Centre. Indirect activities cannot be traced directly to a Cost Centre, and the
cost of these activities is collected into activity cost pools. If the costs in an
activity cost pool can be attributed to a Cost Centre on a cause-and-effect basis,
these activities are known as primary activities. Where the costs in an activity
cost pool cannot be attributed directly to a Cost Centre, they must be attributed to
secondary activities.

3. Assign cost elements to supporting activities (tertiary and secondary)

using resource-drivers. Resource-drivers reflect the quantity of each resource
consumed by the activity.
4. Reassign the cost of supporting activities to primary activities using
resource-drivers.
5. Assign costs from primary activities to Cost Key Points using activity
cost-drivers. Activity cost-drivers reflect the quantity of the primary activity used
by the Cost Centre and activity cost-drivers should have a close cause-and-effect
relationship.
6. Assign to outputs the cost of relevant sub-outputs consumed.
Activity based costing (ABC)
Activity Based Costing (ABC) is useful for both Job Costing and Process Costing.
It examines the way activities consume resources and how they relate to outputs.
The unit cost of products and services determined using ABC can be further
utilized by a costing system to cost jobs which consume these products or
services. These jobs can then be grouped according to the output which they
helped to produce.
Standard Costing
Standard costing is not a costing method; rather it is a technique to calculate a

benchmark against which the actual cost can be compared.

6 Output Costing Methodology
Various steps involved in output costing include the following:

(a) Specify the outputs to be delivered by agencies
(b) Gather accurate and reliable information on costs
(c) Assign costs to outputs
(d) Estimate total output costs for output budgeting
6.1 Step-1: Specification of outputs
There are three basic questions in government budgeting:
i. What does government want to achieve?

(Outcomes)
ii. How does it achieve this?
(Outputs and administered items)
iii. What does it cost to the government?
(Output budgeting)
In other words, government of Mongolia delivers benefits to its people primarily

through administered items (often but not always labeled as programs) and
agencies' goods and services (outputs), which are delivered at a given budgetary
allocation (output budgeting).
All agencies who receive appropriations from Parliament are required to report
on the basis of an outcomes and outputs framework as indicated in their strategic
business plans (SBPs) endorsed by the government. Outputs are deliverables
and the immediate or end results of activities, whereas outcomes are the medium
term result or impact of public programs and policies on the economy and on
user groups.
Agencies apply inputs (e.g., finances, human resources, capital equipment) to

the activities and processes that generate the products and services that
constitute their outputs. These inputs include the funds appropriated to them from
the budget or received through purchaser/ provider arrangements, and revenue
raised through other means, such as sales, user charges and contributions by
trade and industry.

The output and outcome framework & how it works
The outcomes and outputs framework is intended to be dynamic and flexible. It

works as a decision hierarchy:
• government (through its ministers and relevant agencies) specifies the

outcomes it is seeking to achieve in a given area;
• These outcomes are specified in terms of the impact government is aiming
to have on some aspect of society (e.g., education and health), and the
economy (high growth, moderate inflation and low interest regime etc.)
• Parliament appropriates funds to allow the agencies to achieve these
outcomes through delivery of specified goods and services.
6.2 Step-2: Identification and Information on costs
The cost information is collected from the source documents; for example,
purchase invoices and employee time sheets. Cost element information must be
on an accrual basis, because the objective is to include the cost of resources
consumed and not the cost of resources paid for. Accrual accounting leads to
costs being identified for which no cash payment is required by the budgetary
body during the period (for example, depreciation). Another cost which must be
identified and allocated is the cost of the government’s investment in the
budgetary body- this is called the government’s financial charge.
6.3 Step-3: Assignment of direct costs
Cost assignment is the assignment of a cost or group of costs to one or more

outputs. Where a resource is used by only one output, the cost of this resource
consumption can be traced directly to the output. These are called direct cost.
Depending on the nature of outputs, direct costs can include salaries and wages,
travel, materials, consultancy costs and motor vehicle expenses. There are
various ways to assign direct costs to the outputs. Table-2 lists the methods,
which are most commonly used for assigning direct costs to outputs.
6.4 Step-4: Allocation of indirect costs
In many cases, resources are consumed by support activities which cannot be

traced directly to outputs. These overhead costs must be attributed to the outputs
using an allocation method, (for example, the salary of a corporate services staff
member in the head office would be attributed across departmental outputs).
When apportioning overhead costs between outputs, an agency may choose

alternative techniques depending on availability of data. These can be classified
into two categories:
• Logical cause-and-effect or cost-driver
• Arbitrary pro-rata.

Table-2: Methods to assign direct costs to outputs
Method Description Advantages Disadvantages

(When used)
1. Cost centre Direct costs are allocated to the cost • Flexibility and • Costly in the
attribution i.e. centres as they are incurred. sensitivity to short run.
Activity Review Estimates are compiled of a cost change. • Required
(When business center’s or individual time required disciplined
units are for completion of specific activities implementation
responsible for and costs assigned on the basis of .
delivery of one these estimates.
output only)
2. Time recording Employees record the time they • Flexibility and • Costly in the
systems (Useful spend for the delivery of each output. sensitivity to short run.
for assigning The time may be recorded on hourly, change. • Required
direct labor and daily, weekly, monthly or annual disciplined
staff cost. basis. Time recording systems are implementation
generally used for charging and .
other staff related costs.
3.Resource Measure each output’s use of • Flexibility and •Costly to
consumption resources such as photocopies, sensitivity to implement.
accounting computers, telephones and printers. change • Requires
(when the use of The costs are directly charged to the • Tailored for resource for
these resources outputs for the use of these organised ongoing
is significant resources on a transaction basis. For charging. maintenance
easily recorded,) example, the cost of use of • Results in and control.
photocopies might be allocated on equitable
the basis of the cost per page and charging.
number of pages copied. • Provides
information for
value-added
business
decisions.
4. Output Direct costs are allocated to specific • Flexibility and • Required
Accounting output codes in the budgeting body’s sensitivity to disciplined
(Suitable only accounting records (i.e. general change implementation
when there is a ledger) as they are incurred. The
relationship output code can then be used to
between outputs produce a report showing the total
and cost centres. output cost. This method requires all
Judgments need costs to be coded to outputs.
to be applied if a
budgetary body
has many
outputs.)
5. Experienced Management and staff often use • Quick and • May be
judgments (Not a their own experience to estimate easy to inaccurate.
generally each output’s use of resources and implement. • May be
accepted attribute costs on the basis of these • Low cost. arbitrary.
method). estimates. • No formal
documentation.
Logical Cause-and-Effect

With the cause-and-effect technique, costs that cannot be traced directly to

specific outputs are attributed to cost pools/centres. The total cost in a cost
pool/centre is then attributed to outputs based on the cost-driver that causes the
activity to be undertaken. The technique is based on the assumption that there
exists a cause-and-effect relationship between the output and the cost pools.
Some commonly used cost-drivers are:
• Floor space
• Number of staff
• Number of hours worked
• Number of transactions processed
• Number of documents received.
Arbitrary Pro-Rata
This technique attributes costs without determining a clear cause-and-effect

relationship. Usually all overhead costs are firstly aggregated and then attributed
to outputs using some arbitrary pro-rata basis (for example, corporate overheads
are attributed using the number of direct labour hours consumed in producing the
output). As for example, the total cost of computer maintenance can be firstly
attributed on a pro-rata basis of Full Time Equivalents (FTEs), and secondly
using the cause-and-effect relationship of the number of computer work-stations
used by each output. In other words, the more computer work-stations that an
output uses, the greater will be their computer maintenance costs.
6.5 Appropriate costing methodology
Agencies should make an assessment of the most appropriate methodology for

costing and pricing their goods and services. There are three basic methods for
costing individual items viz. Marginal Cost (MC), Fully Distributed Cost (FDC)
and Avoidable Cost approaches.
Marginal cost
Marginal cost is the cost of producing an additional unit of a good or service. It

generally includes direct costs that vary with output and some indirect costs.
Marginal cost can be measured in the short run or the long run. Conceptually, short
run marginal cost (SRMC) gives the best cost estimate of producing an additional
unit of output at any point in time. It excludes capital costs because these are fixed
in the short run. SRMC also excludes many indirect costs such as generic
advertising or management time of the chief executive officer, since they do not
vary with output in the short run. In practice, however, SRMC is difficult to define
and to measure. There are also problems in specifying the short run or long run
periods, and how to treat joint costs. In addition, prices for some products or

services using capital which is ‘lumpy’ could display excessive variability in the
short run.
An alternative measure is the long run marginal cost (LRMC). LRMC is the cost
of supplying an additional unit of a good or service when capacity can be varied. It
comprises not only operating costs, but also the capital costs associated with
increasing productive capacity. Conceptually, LRMC is the correct cost base for
making investment decisions. In contrast to FDC, it excludes indirect costs that are
fixed in the longer run, such as corporate overheads and their associated capital
costs. In summary, marginal cost is, in principle, an appropriate measure of the
cost of additional output.
Fully Distributed Cost (FDC)
Under this method, the total costs of an agency or business are fully allocated to
all commercial and non-commercial outputs. Direct costs are allocated to their
respective outputs, while indirect and joint costs are averaged across all outputs.
The cost base for each output includes the share in direct capital costs (such as
depreciation) and overhead costs (such as corporate services). In the simplest
form of FDC, indirect costs are allocated to activities on a pro-rata basis (for
example, business activity staff as a percentage of total agency staff).
Avoidable/ Incremental Cost
Avoidable Cost includes all direct costs relating to an output, but includes only
those indirect costs that can be avoided if the output was not provided by the
agency. For example, direct costs such as labour and materials and some
indirect costs (such as payroll administration) can be avoided if the output is not
produced. But, other costs, such as some corporate overhead expenses (e.g.
salary of the portfolio Chief Executive) and depreciation on jointly used assets
are incurred regardless of whether the outputs are produced or not. Under
avoidable costing these costs would not be included in the output cost.
Avoidable Cost is usually a long run concept. The longer the time frame, the
more costs become avoidable. To ensure that capital and other long term costs
are considered for inclusion in the calculation of output cost, a medium to long
term time frame should be taken (generally at least three years).
The most important factor for determining the appropriate cost allocation method
is the objective of competitive neutrality. If the cost allocation method leads to a
cost base that is too low in relation to market price, a business unit may be
encouraged to supply a product when it is not efficient to do so. Conversely, if the
cost base is too high, the business may neglect efficient supply opportunities.

FDC is a conceptually simpler costing methodology than Avoidable Costing. If an

agency is already using a FDC approach it may be useful to examine an
Avoidable Cost base, but only when it is expected to have an impact on the
business unit’s decision making.
Table 1 - Treatment of costs under different allocation methods
Diagram-1 outlines the steps involved to fully cost the outputs of a significant
business activity. When using Avoidable Costing, this approach is modified by
selecting only those costs considered to be avoidable.
FDC should take account of:
all direct costs such as labour, materials and premises;

indirect costs (overheads) such as personnel services, IT support,
administration; and
depreciation of physical assets utilised.
The following components of financial management system should be in place,

and will be used to calculate the cost base:
accrual accounting;
output costing; and
asset valuation.

Diagram 1 Step towards Fully Distributed Cost
Full attribution
Direct costs costing
- labour
- materials
- services
Allocated indirect costs

- HR and IT services
- Administration
- Finance costs
Capital costs
- Depreciation of assets
3.7 Step-5: Total costs
The cost of goods and services is incurred through the direct ‘consumption’ of
resources (such as labour and materials) and through the indirect use of capital
and ‘internal services’. The technique for attributing the cost of capital and
internal services (such as rent, telephone, water, fuel, cleaning, maintenance,
human resources, interest etc) must reasonably reflect relative use. The method
of attribution should be documented through establishing accounting policies
internal to an agency to ensure consistent implementation and easy
dissemination over time.
The attribution policies may differ depending on the nature of each indirect cost.
Items that are similar in nature and used in the production or service delivery
processes in a similar way (or items that are immaterial in money terms) could be
summed together and allocated using single allocation policy. A policy can be
determined on the basis of the current best estimate of resource use, but should
be reviewed every two or three years.
Total costs will include both direct and indirect costs. FSMFA (27 June 2002)
mandates that “Cost of outputs shall be determined on the basis of full accrual
cost of production, including management overheads and capital charges”5.
Accordingly the total costs should include the following items:
• Cost of labour directly associated with production of the product or provision

5
Article 26.3 of the FSMFA (2002).

• of the service;
• Cost of materials and services directly consumed in the production process;
• An appropriate share of indirect labour costs;
• Accommodation costs;
• A share of indirect materials and services;
• Capital costs including depreciation of fixed assets and capital charges;
·
6.6 Accrual Output Budgeting
As a part of a broader ‘public management reform program’, Australia budgeting

in recent years are being framed on the basis of a new budgeting system known
as ‘accrual output budgeting’ (AOB), whereby government purchases outputs6
from its departments, under circumstances similar to private business and
competitive market structures. The system was derived from the New Zealand
‘contract’ budgeting system (NZT 1996; Robinson 2000), which was adapted
from the British National Health System (NHS) ‘internal market’ model introduced
in the early 1990s (Culyer, Maynard and Posnett 1992; Bartlett and Harrison
1993). The UK NHS internal market model, based on earlier US ‘prospective
payment’ systems of health finance, was an attempt to place the public funded
NHS on a market footing. Since the early 1990s, Governments in many other
countries introduced a variety of other service-specific internal market models.
In Australia, AOB first came into full operation in 1998, in the states of Victoria
and Western Australia. The Commonwealth (i.e. national) government and most
of the other state governments achieved this position in 1999. The models differ
across the states, although there is a lot of commonality as regards methodology
and basic concepts.
Prior to AOB, Australian Parliaments appropriated funds to departments in two

categories: current and capital expenditure. No distinction was made between,
on the one hand, expenditure on goods and services for which departments were
responsible and accountable and, on the other hand, expenditure which was
beyond departmental control (examples of which include interest on government
debt, and welfare entitlement expenditure relating to legal social insurance).
Under AOB, however, this distinction becomes crucial. As a consequence,
Australian Parliaments now appropriate funds to each department in three
categories: payments for departmental outputs (‘controlled’ outputs); payments
for items not under departmental control (‘administered’ items); and
appropriations to fund new capital funds.
6
In Australia, as in New Zealand, ‘outputs’ have been defined to include not only services
provided to the community, but also services (such as policy advice) which is provided by
departments to ministers or to other elements of the political leadership (Cabinet, Parliament etc).
There is some debate about whether interagency intermediate services might sometimes be
considered to be outputs.

As a reflection of the business model, the ‘payment for departmental outputs’

appropriation is now an accrual appropriation. This means that departments are
required to cover non-cash costs (e.g. depreciation, accumulating liabilities to
employees) as well as the cash costs of their outputs from this appropriation.
AOB also reflects a system of performance budgeting, which explicitly link
budgetary resource allocations with the results (outputs and outcomes). The
starting point for most forms of performance budgeting, including AOB, is
program budgeting, which was the standard public budgeting practice
throughout Australia in the 1980s prior to the adoption of AOB. AOB incorporates
most of the former program budgeting framework. The annual government
budget documents under AOB report the breakdown of funds allocated to broad
output groups within each Department, very much like the former ‘programs’7.
These output groups are groups of related outputs designed to deliver the same
outcome8. Each broad output group comprise a number of sub-output groups,
like the former ‘sub-programs’.
Budgetary allocations for the separate output groups are not binding. Instead,
parliamentary appropriations for departmental outputs are ‘global’, just as they
were under the former program budgeting regime9. In other words, parliament
approves for each department one aggregate sum to cover all the outputs for
which the department is responsible, but has the flexibility to reallocate funds
between outputs during the year in response to unanticipated events.
Although AOB has its roots in program budgeting, it differs from program
budgeting in many respects. First of all, it incorporates private business and
competitive market environment in government activities to ensure efficiency.
Essentially, it builds a market-type superstructure upon program budgeting
foundations (WAT 1996a). In this respect, it differs considerably from the forms of
performance budgeting which operate in other countries and do not generally
regard agency profit results as a key performance measure. To take an example,
in the USA under the system of ‘performance based program budgeting’ the
annual budget for each agency passed by the legislature includes only output
and outcome targets, but no prices. The United Kingdom has developed since
1998 a system of Public Service Agreements and Service Delivery Agreements
between the Government and agencies linked to the budget. In Australia, New
South Wales is the only state not to have adopted accrual output budgeting.
7
Output groups are defined in such a way that they more truly reflect the concept of an output
than that under the program budgeting practice. For example, departments are not permitted to
use ‘corporate services’ as an output group, although corporate services programs were common
under program budgeting.
8
The Commonwealth refers to ‘Outcomes’ rather than output groups, meaning the same thing.
9
The Commonwealth submits appropriations to Parliament in a form grouped into ‘outcomes’.
However, this allocation is not binding, and is purely for information (DOFA, 1998; 1999c).

Another important aspect of the Australian AOB is that the capital appropriations
to departments have now been re-labeled as ‘equity injections’10. Finance
ministries assert that, in addition to equity injections, departments may, like
private corporations, have access to two main alternative capital funding sources.
The first is the so-called ‘depreciation-based’ capital funding, which is a draw-
down of the accumulated depreciation reserves. The other is the ‘rearrangement
of the asset structure’, an accounting jargon for funds derived from departmental
asset sales (Robinson, 2002a). Consequently, Australian agencies, like private
enterprises, enjoy considerable degree of freedom for new investments.
So-called ‘capital charging’ has also been introduced by most of the states in the
Australian AOB system. Capital charging is a private-sector idea to include it as a
part of the output cost to reflect return on capital. Its first application to the public
sector appears to have been by the British National Health Service (NHS). New
Zealand subsequently extended capital charging to the whole budget sector. The
idea is that, in addition to depreciation, a type of ‘interest’ charge is levied upon
departments for the use of the capital, particularly in physical assets. The rate of
the capital charge is supposed to reflect the opportunity cost of capital provided
to Departments, and it is expected that that the Agencies to which the
government provides capital should earn at least a ‘normal’ rate of return.
Proponents of capital charging argue that it would reduce wasteful capital
expenditure and encourage the identification and sale of idle and surplus assets.
Clearly, in a budgeting system based upon output prices, it is logical to treat the
opportunity cost of capital as a component of cost in price-setting. Accordingly,
the State governments which impose capital charges treat it as an ‘above the
line’ expense in operating statements. However, the Commonwealth Government
takes a different approach, treating the capital charge as a ‘below the line’ entry,
treating the capital charge equivalent of a profit dividend paid to shareholders.
Benefits of Accrual Output Budgeting
The above analysis suggests that the ‘market’ principle of funding based on
output prices can only be selectively applied in the public sector. In addition to
the distinctive ‘market’ aspects of AOB, the system has led to a renewed effort to
improve and extend performance measures and indicators. Considerable work is
being undertaken in the Australia, Canada, New Zealand, UK and USA to
articulate the linkages between outputs and outcomes, and strategy. Moreover, it
has been associated with a major drive to shift public sector accounting in
Australia onto an accrual basis: a step which arguably has many benefits in other
areas, including fiscal policy (Robinson, 2002).
6.7 Cost Allocation: An Example
10
The Commonwealth differs from the states in that it provides loans to the departments as well
as equity injections (DOFA 1998; 1999c).

The following example11 provides a practical illustration of the issues involved and
the use of different methods for allocation of costs. A department has a policy
division and a specialized computing division. The computing division consists of
about ten per cent of departmental staff. The department’s mainframe computer is
used solely by the computing division and operates at around 70 per cent capacity
with a capital cost (including depreciation) of $50 000 per annum which is fixed
regardless of its use. Such spare capacity is not uncommon and may arise from a
number of factors such as:
• lumpiness in the capacity of the equipment;
• anticipation of greater demands on the system in the future; and
• not having night shifts.
Given that the capacity of the system never exceeds 70 per cent, the department
accepts a contract for data processing from another agency. Over the next 12
months, the department expects that this extra processing work will use the
remaining 30 per cent of the capacity of the computer system. The department
expects to hire two extra processing employees ($80 000) to cope with the
additional workload associated with the private contract while the number of
systems employees will remain the same. Some new expenditure on training
($2500), new equipment ($3000) and travel ($3000) is expected. Some other
overheads, such as communications costs are also expected to increase, while
others such as maintenance, rent and electricity are expected to remain the same.
Table-2 shows the department’s total costs before and after it accepted the
commercial activity. As is evident from Table-3, the cost of the commercial
activity using the avoidable cost methodology is much lower than the fully
distributed approach. The cost of the commercial activity using the avoidable cost
method is $94,300 comprising labour, training and some other overheads that vary
with the level of output. The cost of capital is not included since capital is an
expense which would have been incurred regardless of whether the commercial
service was provided or not. By contrast, the cost of the activity on a fully
distributed cost basis is $196,000. For the purposes of simplicity, indirect costs
have mainly been allocated to the commercial activity on the basis of the
proportion of commercial staff to total staff (2 percent). The large difference in
costs arises in this example because the avoidable cost calculation does not include
rent, some corporate overheads or capital costs. As this example illustrates, it is
not possible to mechanistically apply the avoidable cost method. Deciding what is
avoidable, a five year timeframe has been taken as a short period.
11
Source: “Cost Allocation and Pricing- Research Paper”, Commonwealth Competitive Neutrality
Complaints Office (CCNCO), Commonwealth of Australia, Canberra, 1998.

Table-2: Cost structure at Departmental level
Costing results
The following allocation principles have been applied for cost allocation in
Table-3:
(a) Cost of capital (computer) - Full cost charged directly to the division, then
pro-rated to the contract
based on capacity usage (i.e., 50 000 x 30%).
(b) Computing labor (systems) - Pro-rated to the contact based on capacity
usage (i.e., 150 000 x 30%).
(c) Computing labor (processing- The cost (80 000) of the additional staff
required to service the commercial activity is charged directly to the contract.
Processing labour used for non-commercial functions (350 000) is not charged to
the contract.
(d) Policy and program labor - Not allocated to the division as functions are
unrelated.
(e) Executive labor- Pro rated on the percentage of commercial staff to total
staff (2% x 400 000).
(f) Other corporate labor- 350 000 x 2%
(g) Training- Training for the contact staff is charged directly (2500).
(h) Furniture & fittings- 100 000 x 2%
(i) Other equipment- The cost increase (3000) is charged directly.
(j) Rent - 1 000 000 x 2%

(k) Electricity- 170 000 x 2%
(l) Travel - Charged directly
(m) Telecommunications- 500 275 800 x 2%
(n) Stationery- 80 000 x 2%
Table-3: Cost of meeting the contract under different cost allocation methods

6.8 A Case study12 for Output Costing
The University of Australia’s Economics Department has decided to undertake

Output Costing, and to consider the following subjects as “cost objects”:
(A) Accounting;
(B) Economics;
(C) Econometrics; and
(D) Applied mathematics.
The Department’s Cost Pool’s have been identified as:
(a) Library;
(b) Lecturers;
(c) IT;
(d) Enrolments
Activity Based Costing Example
The General Ledger provides the following information:
Cost pools (Cost) General Ledger Expenses Expense (A$)

Library ($40,000) Library staff wages 20,000
Book purchases 15,000
Library consumables 5,000
Lecturers ($112,000) Accounting lecturers wages 15,000
Economics lecturers wages 15,000
Econometrics lecturers wages 16,000
Applied Maths lecturers wages 16,000
Other lecturers wages 35,000
Lecturers travel 12,000
Lecturers subscriptions 3,000
IT ($125,000) Help Desk costs (including wages) 75,000
Software subscriptions 50,000
Enrolments ($18,000) Enrolment staff wages 10,000
Enrolment office consumables 8,000
Based on surveys, questionnaires, timesheets and other statistics, the following

data has been collected:
12
Source: Output Costing Methods Module: A Costing Framework, Queensland Treasury, November
1998.

Cost drivers Accounting Economics Econometrics Applied Total

Math
No. of library
borrowings 250 500 50 200 1000
Lecturers’ time
spent (%) 25 30 10 35 100
Help desk
requests (No.) 45 15 25 25 110
Student
Enrolments
(No.) 50 75 25 100 250
Distribution of Cost Drivers in proportion to total

Cost drivers Accounting Economics Econometrics Applied Total
Math
No. of library 0.25 0.50 0.05 0.20 1
borrowings
Lecturers’ time 0.25 0.30 0.10 0.35 1
spent (%)
Help desk 0.41 0.14 0.23 0.23 1
requests (No.)
Student 0.20 0.30 0.10 0.40 1
Enrolments
(No.)
On the basis of these information and data, the allocated costs for different
sub outputs are indicated in the following diagram.

6.10A Case Study13 for Costing Government Services
Computer West is a division of a department providing information

technology to other government agencies, including in remote areas.
The Division's service is shown in the department's budget statements
as 'Information Technology Installation and Support' having two
related activities – 'Installation' and 'Support'. The Division operates
from a large building owned by a parent department. The building has
an underground storage area for vehicles and supplies of electronic
equipment, an electronic security system, offices and communication
equipment for providing support throughout the State.
The total service has the following annual (GST exclusive) cash cost
profile:
13
Source: Department of Treasury and Finance (2007) Costing and Pricing of Government
Services- Guidelines for Use by Agencies in the Western Australian Public Sector, Fifth Edition,
Government of Western Australia, April 2007.

The costs shown above exclude a number of important components of full cost:
Depreciation
The inclusion of depreciation as a capital-related cost will ensure that some

allowance is made for the use of capital equipment. The following depreciation
expenses should be included in the measurement of full cost:
Opportunity cost of capital
For the purposes of this worked example, a rate of 6 per cent is used to
represent the foregone opportunity to invest assets in the Public Bank Account.
The rate is applied to the net assets of the organization, as illustrated below:
Assets
Head office overheads
The Computer West Division has to bear its share of the department's
administrative costs for items such as the chief executive's salary. Its share of
these costs is estimated to be $96,000.

Services received free of charge
For the purposes of this exercise, the parent department’s accounts are assumed
to be audited at no charge by the Office of the Auditor General. The value of this
service is estimated to be in the order of $30,000 of which the Division’s
allocated share is $10,000.
Total cost
The full cost of Computer West’s operations is therefore:

Selected References
Bartlett, W. and L. Harrison (1993), ‘Quasi-Markets and the National Health

Service Reforms’, in J le Grand and W. Bartlett (ed.), Quasi-Markets and Social
Policy (Macmillan, London).
Bureau of the Budget (BOB) Budget Modernization Program (1999) Report

of Graham Scot and Lewis Hakwe, Sector Experts, Office of the Civil Service
Commission Pilot Project, Thailand, Bangkok.
Commonwealth Competitive Neutrality Complains Office (CCNCO) (1998)

Cost Allocation and Pricing, CCNCO Research Paper, Commonwealth of
Australia, Canberra, October 1998.
Das, Tarun and E. Sandagdorj (2007) Preparation of Strategic Business Plans-

General Guidelines, Some Suggestions for Improvement, and Summary of
Recommendations- Final Report, pp.1-74, Ministry of Finance, Government of
Mongolia, Ulaanbaatar, September 2007.
Department of Treasury and Finance (2006) Costing Fees and Charges:

Guidelines for Use by Agencies, Government of Australia, December 2006.
Department of Treasury and Finance (2007) Costing and Pricing of

Government Services- Guidelines for Use by Agencies in the Western Australian
Public Sector, Fifth Edition, Government of Western Australia, April 2007.
Diamond, Jack (2002) Performance budgeting, is accrual accounting required?,

IMF Working Paper no.WP/02/240, International Monetary Fund, Washington
D.C.
DOFA (Department of Finance and Administration) (1998) Specifying

Outcomes and Output: Implementing the Commonwealth’s Accrual-Based
Outcomes and Outputs Framework, DOFA (Canberra).
DOFA (Department of Finance and Administration) (1999a) Accrual

Resourcing Framework, DOFA (Canberra).
DOFA (Department of Finance and Administration) (1999b) Commonwealth

Accrual Budgeting Guidelines, DOFA (Canberra).
DOFA (Department of Finance and Administration) (1999c) Accrual

Appropriation Framework, DOFA (Canberra).
Mercer, John (2003) Cascade Performance Budgeting- A Guide to an Effective

System for Integrating Budget and Performance Information and for Linking Long
Term Goals to Day-to-Day Activities, May 2003.

Mercer, John: See Website on GPRA and Performance Management:

www.governmentperformance.info
NZT (New Zealand Treasury) (1996) Putting It Together: An Explanatory Guide

to the New Zealand Financial Management System, The Treasury (Wellington).
Queensland Treasury (1998) Output Costing Methods Module: A Costing

Framework, Government of Australia, November 1998.
Robinson, Marc (2000) ‘Contract Budgeting’, Public Administration, Vol. 78, No.
1, pp.75-90.
Robinson, Marc (2002) ‘Accrual Accounting and Australian Fiscal Policy’, Fiscal
Studies.
Robinson, Marc (2007) edited. Performance Budgeting- Linking Funding and

Results, Palgrave McMillan.
South Australian Department of Treasury and Finance (2000) A Guide to

Implementation of Cost Reflective Pricing- A Part of Neutrality Competitive Policy,
October 2000.
USA (1993) Government Performance and Results Act (GPRA) of 1993, Office of
Management and Budget (OMB).
United States of America, Office of Management and Budget (OMB)

Homepage: http://www.whitehouse.gov/omb/gils/gil-home.html
VDTF (Department of Treasury and Finance, Victoria) (1998a) Accrual

Accounting Manual, Melbourne: The Department.
VDTF (Department of Treasury and Finance, Victoria) (1998b) The Capital

Assets Charge in 1998-99, The Department (Melbourne).
WAT (Treasury, Western Australia) (1998) Output Based Management Output

Measures - Guidelines To Assist Agencies, The Treasury (Perth).

________________________________________________________________
APPENDIX - GLOSSARY
Accrual Accounting Accounting method in which revenue and

costs are recognized for the period in which
they are incurred, irrespective of whether
cash has been received or paid.
Activity Based A costing approach which focuses on

Costing (ABC) identifying activities required to produce
outputs. Direct and indirect costs are
allocated to the activities performed in order
to produce a product. This contrasts with
traditional costing techniques that focus on
the elements of cost. For example, ABC
would assign a cost for ‘providing policy
advice’ and ‘administering a grant program’
rather than ‘labour’ or ‘property operating
expenses’.
Avoidable Cost Those costs that would be avoided if an

operation were suspended or closed down
. (such as raw materials and labor cost). Many
components of avoidable costs are similar to
those of marginal costing. However, marginal
costing focuses on the change in costs
arising from an additional unit of output
while avoidable cost takes a more macro
approach by focusing on the costs of adding
or deleting an entire function or operation.
Cost Allocation Base The basis for allocating costs to an output,

activity, process, project, or cost centre, etc.
That basis may be the cost driver or a
different basis altogether. For example, staff
numbers, office floor space.
Cost Driver A factor or variable that triggers the

occurrence of a cost or has the greatest
effect on the activity level. When it is
impossible or impractical to measure the
triggers, a surrogate should be used instead
(something which has strong correlation with
Glocoms Inc. (USA) 48 MOF, Govt. of Mongolia

________________________________________________________________
the activity being measured).
Cost of Capital The costs associated with working capital

and capital goods (i.e. depreciation and
opportunity cost). The required rate of return
on the investment of funds in capital goods
(e.g. plant, equipment etc), land and
financial assets.

________________________________________________________________
Cost Reflective Cost of outputs adjusted for any competitive

Pricing (CRP) advantages and disadvantages due to
government ownership and setting an output
price on the basis of principle of
“competitively neutral cost”. It is one of
three measures to implement competitive
neutrality, and used where the other two,
viz. corporatization and commercialization,
are not appropriate. It can be used in
conjunction with structural reform (resulting
in greater private sector equivalence) or
without any organisational restructuring.
Current Asset An asset that, within the normal course of

events, is expected to be converted into
cash within the next 12 months.
Current Cost A cost stated in terms of current market

prices rather than historical cost.
Debt Guarantee Fees A fee which is intended to eliminate the

competitive advantage of a government
activity over private sector competitors
through receiving cheaper finance as a result
of a government guarantee. The fee applies
to the face value of debt outstanding, but
may vary according to the level of debt and
an assessment of risk.
Depreciation An expense that measures the consumption

of an asset over time and according to the
intensiveness of its use.
Differential (or Future costs that differ between one course

incremental) Costs of action and another— whether fixed or
variable.
Direct Allocations Allocates costs directly to the final user of

the service and ignores intermediate users
and support services.
Direct Costs Those costs which can be directly and

unequivocally attributed to the production of
an output.

________________________________________________________________
Fixed Costs Those costs that remain unchanged in total

for a given time period and level of
operation, despite fluctuations in output
level. This is only relevant in the short term,
as in the longer term all costs become
variable.
Full Cost The total cost of all resources used in the

production of an output. The total of direct
and indirect costs.

________________________________________________________________
Full Costing The process of accumulating and allocating

the total costs of a business unit to all of the
activities undertaken by the unit. Under full
costing, indirect costs and overheads are
fully absorbed into the costs of activities. Full
cost may be defined per unit of output
(average full cost) for the complete business
unit. The measurement of full cost provides a
key benchmark in the sense that it
represents the minimum level of revenue
that has to be generated by firms in the
private sector to remain commercially viable
in the long term.
Government Business Activities which produce goods and services
Activities (or for sale in the market with the intention of
Commercial earning profits and financial returns to their
Activities) owners, or at least of recovering all or a
significant proportion of their operating
costs.
Government An undertaking by the government to cover

Guarantee the liability of an entity in the event that it is
unable to meet its debt servicing obligations.
It is regarded as a contingent liability of the
government.
Indirect Costs Costs that are not exclusively or directly

attributable to an output, but necessary for
the functioning of an organization (such as
cost for chief executive officer).
Inputs Labour, materials and other resources used
to produce outputs.
Long Run A period of time in which capacity can be

considered to be variable.
Long Run Marginal The cost of the last unit of production when
Cost productive capacity can be altered.
Marginal costing A system of costing that examines the

change in total costs resulting from an
increase in one unit of production. Marginal
costing is based on the distinction between
fixed and variable costs. Marginal costs will

________________________________________________________________
generally be less than average full cost as
marginal costing will not include fixed costs.
However, some of the fixed costs will often
become variable costs in the mid to long-
term. Short run marginal costing will,
therefore, exclude a number of fixed costs
that would not be excluded for the long run
marginal costs.
Non-Commercial Activities the agency undertakes but which,
Activities on a purely commercial basis, it would not
otherwise undertake.
Non-Current Asset An asset that is not expected to be

converted into cash within the next 12
months under normal circumstances.
Opportunity Cost The income (or cost) that could be earned

(or saved) from the next best alternative use
of a resource.
Outputs Products or services produced and delivered
by government businesses for customers or
users external to the department or agency.
Output Cost The cost to an agency of producing an
output for appropriation purposes in a
budgetary context.
Outsourcing A decision to discontinue internal production

of an output and to instead rely on the
external production of the output.
Overheads Indirect costs that must be apportioned to
outputs.
Replacement cost The cost to replenish a given amount of an asset.
Resources Labour, materials and other inputs used to

produce outputs.
Short Run A period of time in which capacity of a
business organization can be considered to
remain fixed.
Short Run Marginal The cost of the last unit of production when
Cost productive capacity is fixed.
Sunk cost A cost that is already incurred and is therefore irrelevant

to any decision making process.
Target Rate of Return An appropriate commercial rate of return on

________________________________________________________________
assets (or equity) which reflects the cost of
capital from the owner’s perspective.
Transition cost The once-off costs incurred in changing an activity from

public to private operation and vice versa.
Variable costs Costs that fluctuate in direct proportion to

changes in the level or volume of output.
Weighted Average An approach under which the cost of equity

Cost of Capital is calculated in accordance with the Capital
Asset Pricing Model using the following
inputs:
• A risk free rate of return (normally
equivalent to the 10-year Treasury bond
rate);
• A market risk premium for additional risk
attached to equity investments versus debt;
• A factor to represent the volatility of
investment compared to the total equity
market.

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Output Budgeting – Tarun Das

Output Costing and Output Budgeting –

Prof. Tarun Das1, Ph.D.

Glocoms Inc. (USA) MOF, Govt. of Mongolia

Output Costing and Output Budgeting –

Prof. Tarun Das, Ph.D.

1. Current Status of Budgeting System in Mongolia

4. Benefits of Output Budgeting and An Overview

5. Costing Framework- Basic Concepts and Principles

6. Output Costing Methodology

Glocoms Inc. (USA) MOF, Govt. of Mongolia

1. Current Status of Budgeting Systems in Mongolia

1.1 Budget Planning

The current budget planning arrangements in Mongolia are comprehensive in

It is necessary to establish a more output and outcome oriented approach to

A focus on outputs simplifies the projection of forward estimates by avoiding the

Glocoms Inc. (USA) MOF, Govt. of Mongolia

Output budgets need to be based on reliable estimates of output costs. This

1.2 Output Costing and Output Budgeting

Presently the HQ of a Ministry adopts a methodology which can be described as

An effective and comprehensive costing system is essential to output based

Glocoms Inc. (USA) MOF, Govt. of Mongolia

It is reasonable to introduce a simpler costing system initially and then to move to

♦ Outcomes, outputs and activities,

2. Requirements for Moving to Output Budgeting

A. Move towards Output Costing and Output Budgeting by the line

1. To establish an integrated planning, costing, budgeting and reporting

(a) Preparation of Strategic Business Plans with specification of the

2. To establish a comprehensive costing framework that links the

Glocoms Inc. (USA) MOF, Govt. of Mongolia

3. To prepare annual output budgets as a part of the Portfolio Budget, and

4. To strengthen the internal audit service to include performance

5. Ideally, a fully automated financial accounting and reporting system need

6. A proper risk management system also needs to be developed to take

(a) To develop a clear and uniform framework for government

(b) Central asset reporting arrangements may be reviewed to focus

Glocoms Inc. (USA) MOF, Govt. of Mongolia

3: Recommendations and Desired Action Plan

1.1 MOF should develop a new budget framework based on outcomes,

2.1 There is a need to move to an output and outcome budgeting and

Glocoms Inc. (USA) MOF, Govt. of Mongolia

1.1 MOF should develop a new budget framework based on outcomes,

3. New Accounting Heads and Codes

3.1 There is a need to develop a new chart of accounts to facilitate

Glocoms Inc. (USA) MOF, Govt. of Mongolia

1.1 MOF should develop a new budget framework based on outcomes,

4. Financial and Performance Reporting

4.1 Outputs and outcomes need to be defined and specified clearly.

6.1 Internal audit and accounting systems need to be strengthened after

Glocoms Inc. (USA) MOF, Govt. of Mongolia

1.1 MOF should develop a new budget framework based on outcomes,

Glocoms Inc. (USA) MOF, Govt. of Mongolia

4. Benefits of Output Budgeting and An Overview

4.1 Role of output budgeting in Public Administration of Mongolia

The Government of Mongolia is implementing a set of governance reforms which

4.2 An overview of output costing and output budgeting

(a) Determine the outputs to be budgeted

Step 1 – Determine the outputs to be costed and budgeted

Glocoms Inc. (USA) MOF, Govt. of Mongolia

Step 2 – Define the Required Costing Structure

The Purpose of the Costing System and Framework

The Costs to be assigned through the Costing System

The Existing Cost Structure

Step 3 – Review the Existing Costing System