Reducing Spending Not to Eliminate Programs But to Increase Efficiencies
A Collaboration Between Accountants and Program Managers
This essay offers a practical tip in the financial management area within good governance. It is part of the monthly series on strengthening governance in private companies, non-profit organizations, and public institutions.
“Although [public] organizations can boast of elaborate accounting systems typically featuring thousands of accounts, their … administrators often lack the most rudimentary cost information on the programs that they manage and the activities in which they engage.”[1]
Budgets provide a list of figures for salaries, fringe benefits, supplies, and other expenses. But what do the numbers really mean? How do we know what specific item is needed to complete a project? Which expenses truly contribute to achievement of outcomes?
Programs will state a total dollar amount to accomplish goals and objectives. $100K for a small project. $100 million for a national program. What was the basis for proposing the total amount? Surely, it wasn’t picked from thin air. How do we know what a program really costs? What is the verifiable value of a program?
Budgets and programs are typically managed by two different units in an organization. A finance office handles the budget side. And a program office focuses on the program side. The two teams bring their own area of expertise and speak their own language. The nomenclature used by one team may be incomprehensible to the other team. Program managers may not understand certain accounting terms. Accountants may not understand terminology used in measuring program results.
Cost accounting is a discipline that can bring accountants and program managers to a mutual understanding on how programs and budgets are related. Interestingly, cost accounting has a long history that can be traced back to the late 1880s as part of the progressive movement to solve the problem of graft.[2] The purpose of cost accounting is to document the full cost of a project with the aim of relating inputs (monies spent on resources) to outputs (products or services produced). Once inputs and outputs have been identified and logically associated to each other, levels of efficiency can be determined.
A particular form of cost accounting is activity-based costing (ABC). ABC organizes cost items including overhead costs in “cost pools” and allocates them to specific activities.[3] Granof and his team demonstrated this method in context of teaching, service, and research in a university and showed cost differences by academic programs, non-uniform support costs across programs, significant occupancy costs, staffing inefficiencies, and generally a different way of seeing the same accounting data.[4] Cost accounting displays financials not like a conventional income statement.
There’s debate and wide variety in applying cost accounting in practice. The literature uses slightly different wording that more or less reinforces the same construct.[5] Some would argue that cost accounting encroaches into the domain of performance management. Mohr explained that the two functions are separate control systems; and while leaders would benefit from integrating the two systems, program managers would resist the linkage of costs to outcomes because of an inability to control outcomes that cannot be controlled.[6] Public and non-profit organizations design social programs in which success or failure is determined by external factors that program managers cannot control. Implementing social programs are inherently risky and uncertain. Measuring outputs and outcomes—particularly in the public sector—involve a structured process that’s carried out through program monitoring and evaluation. Kroll and Moynihan described tensions and potential complementarities in applying management techniques to measure performance and conducting rigorous program evaluations based on social science research to find causal links in observable outcomes.[7] In sum, incorporating performance in accounting is a complicated endeavor that necessitates fusing multiple knowledge areas.
McCue argued that traditional accounting is ill-suited to meet the requirements of full-cost accounting, and advised accountants to broaden their skillsets beyond technical competencies into areas that would allow them to provide internal consultancy, decision-making support, and other value-added services to executive leadership.[8] Accountants who remain focused on entering journal entries, creating trial balances, and reconciling bank statements might be replaced by a computerized machine that automates those repetitive tasks. It makes sense professionally, especially in the present era of rapidly developing emerging technologies such as artificial intelligence, for accountants to learn about the non-financial aspects of program management. They would benefit from understanding program-related topics such as logic models, results-based frameworks, and performance metrics, which are foundational to a strong performance measurement regime. In like manner, it wouldn’t hurt for program managers to gain some knowledge of financial accounting.
“Traditionally, government financial systems and government managers have focused on tracking how agencies spend their budgets, but have not focused on assessing the costs of activities to achieve efficiencies. Managerial cost accounting begins with an output such as a service and traces the costs of activities needed to produce the service.”[9]
In a review of 10 federal agencies from 2005 to 2007, the Government Accountability Office (GAO) found obstacles and inadequacies to implementing a compliant cost accounting system. Problems involved the reliability, assignment, and documentation of non-financial data.[10] Internal controls are necessary not only for financial data but for non-financial data as well. The GAO concluded that “a cultural change [is required] in traditional financial management practices.”[11]
Indeed, when General George T. Babbitt, Jr. led the Air Force Material Command (AFMC), he instituted practices that sought to change the mindset of personnel. Mission areas were referred to as businesses; budget managers were called cost managers; and the job of cost managers was not to spend the entire budget but to lower unit costs without sacrificing quality.[12] General Babbitt had a pragmatic business-like ethos that was not unlike leaders in the private sector. While AFMC achieved success in returning funds to Washington and improving the agency’s financial position, the case study of AFMC revealed a problem of a skills mismatch in that “[government managers’ skills] are not especially pertinent to the tasks of cost and performance management.”[13]
Other studies in the literature confirmed the existence of capacity issues. State governments reported a lack of resources and time to align their budget systems with performance-based budgeting.[14] Local governments noted the need for active involvement in performance reviews and concrete examples in performance tracking for continuous improvement.[15] Leaders may not have all the details to understand how indirect costs are associated to outputs.[16] Staff competency, time availability, and information technology support pose limits on agencies’ ability to utilize performance-based budgeting.[17]
Despite implementation challenges, efforts have had positive effects at state and local government agencies. Different groups collaborated more, winning support from various stakeholders.[18] Communication increased between budget and program managers, allowing budget managers to gain more knowledge about programs.[19] Departments held themselves accountable by tracking performance levels.[20]
It is clear from the literature that leadership is needed to sustain efforts to continue cost accounting in the long term. Specialists need approval from their supervisors on the amount of time that they can spend working on performance related activities. Managers need clear direction and consistent guidance on setting and monitoring input costs and performance metrics. Cooperation needs to be encouraged for budget and program managers to communicate with each other. All of these needs require leaders to formulate and execute strategic and operational plans to implement an effective cost accounting system.
Private companies readily adopt cost accounting to be competitive in the marketplace. Business managers have to find areas to decrease production costs in order to increase productivity and maximize profits. Companies that fail to reduce expenditures may be at a disadvantage compared to their leaner, cost-efficient competitors.
Public organizations may not have the same incentive as the private sector. But an incentive exists, nonetheless, that forces the public sector to manage and lower costs. Reduced funding looms amid political arguments over program priorities, budget delays to pass full-year appropriations, and decreased revenue projections. Services still need to be provided. Public managers will need to find areas where they can lower their service costs to increase efficiency and maximize service delivery. And to do that public managers must understand the underlying structure that forms the basis for linking input costs to service outputs to program outcomes.
Cost accounting is not the exclusive domain where accountants and other financial experts have all the knowledge and insights to manage and assess cost information. It’s an area of responsibility shared with program managers. Program managers and program-related technical specialists have their expertise to define and monitor performance goals and explain the context in which goals and costs are related and how inputs influence outputs. Cost accounting is an opportunity for accountants and program managers to collaborate.
Evidence for Practice
Cost accounting is a specialized field that borrows knowledge from economics, financial accounting, performance management, and program evaluation.
A culture of spending every penny of a government program with no thought of returning unneeded money directly opposes the central aim of cost accounting, which is to increase efficiency.
Public managers have inadequate skills to effectively analyze costs for performance.
Next Steps for Leaders
Leaders should promote a culture of finding cost savings and returning unneeded funds wherever possible. Unused funds can be reallocated to competing priorities. Individuals who find cost savings and efficiencies should be rewarded for their efforts.
Finance managers, accountants, and related staff should collaborate with program staff on activities related to performance. Especially with regard to understanding cost inputs in relation to program outputs, a discovered inefficiency rating doesn’t necessarily indicate a problem. The program manager would be able to explain the circumstances behind the low efficiency. Finance staff would gain invaluable insights as they investigate the matter.
Training on cost factors, cost analysis, and cost-effectiveness should be provided to managers and staff. A formal course on microeconomics would cover the fundamentals and principles. A critical part is understanding fixed costs and variable costs and how those factors have an effect on direct costs and indirect costs.
Open for Discussion
Does your organization use cost accounting or a similar form to associate outputs to inputs? Have you had success? Did you encounter any challenges? Feel free to submit your answers in the comment section. If you’re not comfortable sharing your experiences, you can talk to a specialist at Peaceful Governance Institute (PGI) in private; click this link to call the PGI hotline support.
Notes
1. Michael H. Granof, David E. Platt, and Igor Vaysman, (2000) “Using Activity-Based Costing to Manage More Effectively,” January, (Arlington, VA: The PricewaterhouseCoopers Endowment for The Business of Government): 6. (Accessed 24 April 2026 at https://www.businessofgovernment.org/sites/default/files/ABC.pdf.)
2. William C. Rivenbark, (2005) “A Historical Overview of Cost Accounting in Local Government,” State and Local Government Review 37(3): 217.
3. Granof, et al.: 7–8.
4. Granof, et al.: 21–25.
5. Cost accounting, activity-based costing, managerial cost accounting, performance-based budgeting, performance budgeting, and responsibility budgeting follow basic principles, designed to reach similar ends. Responsibility budgeting diverges to focus on the relationships of managers and decentralized decision-making in the process of executing a performance-based budget (see Barzelay and Thompson: 131–132).
6. Zachary T. Mohr, (2016) “Performance Measurement and Cost Accounting: Are They Complementary or Competing Systems of Control?” Public Administration Review 76(4): 619–620.
7. Alexander Kroll, and Donald P. Moynihan, (2018) “The Design and Practice of Integrating Evidence: Connecting Performance Management with Program Evaluation,” Public Administration Review 78(2): 184–185.
8. Clifford P. McCue, (2001) “Local Government Accountants as Public Managers: An Evolving Role,” State and Local Government Review 33(2): 146, 155–156.
9. Government Accountability Office, (2007) “Managerial Cost Accounting Practices: Implementation and Use Vary Widely Across 10 Federal Agencies,” GAO-07-679, 20 July, U.S. Government Accountability Office: 26. (Accessed 24 April 2026 at https://www.gao.gov/products/gao-07-679.)
10. GAO: 20, 25.
11. GAO: 27–28.
12. Michael Barzelay, and Fred Thompson, (2006) “Responsibility Budgeting at the Air Force Materiel Command,” Public Administration Review 66(1): 128–129.
13. Barzelay and Thompson: 135–136.
14. Yilin Hou, Robin S. Lunsford, Katy C. Sides, et al., (2011) “State Performance-Based Budgeting in Boom and Bust Years: An Analytical Framework and Survey of the States,” Public Administration Review 71(3): 375.
15. William C. Rivenbark, Dale J. Roenigk, and Roberta Fasiello, (2017) “Twenty Years of Benchmarking in North Carolina: Lessons Learned From Comparison of Performance Statistics as Benchmarks,” Public Administration Quarterly 41(1): 142–144.
16. Zachary Mohr, (2017) “Cost Accounting at the Service Level: An Analysis of Transaction Cost Influences on Indirect Cost Measurement in the Cost Accounting Plans of Large US Cities,” Public Administration Quarterly 41(1): 95–97.
17. Alfred Tat-Kei Ho, (2018) “From Performance Budgeting to Performance Budget Management: Theory and Practice,” Public Administration Review 78(5): 749–750.
18. Hou, et al.: 377.
19. William C. Rivenbark, David N. Ammons, and Dale J. Roenigk, (2005) “Benchmarking for Results,” December, (Chapel Hill, NC: University of North Carolina, School of Government): 6. (Accessed 24 April 2026 at https://www.sog.unc.edu/sites/default/files/reports/benchmarkingresults05.pdf.)
20. Rivenbark, et al.: 140.