The True Cost of Services
The recordkeeping system of a local government should do more than simply account for dollars received and dollars spent. It should serve as a tool for managing that government’s operation. To do this, the recordkeeping system must give management an accurate measurement of the true cost of providing a service. The true cost includes the many indirect expenditures that are incurred in the process of service delivery. These expenditures are often hidden costs that tend to be charged to miscellaneous categories or are often arbitrarily charged to appropriation accounts that do not establish a clear link between the expenditure and the service that ultimately results.
OSC auditors frequently find that, due to how local governments account for expenditures and revenues, the reported cost of providing various municipal services is incorrect. Just as it is important to allocate indirect costs to service areas at budget time, it is equally important to allocate actual revenues and expenditures to appropriate service areas throughout the year in the accounting and recordkeeping system.
Personal service expenditures (including employee benefits) and contractual expenditures for such items as supplies, materials, and utilities normally represent approximately 75% of total expenditures for local governments. The improper allocation of these expenditures often results in decision makers receiving inaccurate information regarding the true cost of municipal services.
Properly designed accounting and recordkeeping systems allow accurate information to be communicated to decision makers.