Description
Directions: Your job as Finance Director is to recommend to the City Council of Cliffsville if it should contract out for ambulance service or keep it as is?Please write a one page memo making your recommendation – you can include some basic costs data as well.Massachusetts Department of Revenue
Alan LeBovidge, Commissioner
Division of Local Services
Robert G. Nunes, Deputy Commissioner & Municipal Affairs Director
Costing Municipal Services
Workbook and Case Study
March 2005
Department of Revenue
Division of Local Services
HOW TO USE THIS WORKBOOK
PART ONE
A Guide to Costing Municipal Services presents the basic concepts and techniques of
costing. It is intended both as an introduction for officials new to costing and as a
refresher for officials who have used costing before.
PART TWO
Masstown Ambulance Service, illustrates the concepts and techniques discussed in
Part One. As you work through the case study, you may wish to refer to specific
aspects of costing presented in Part One.
In previous editions, there was a Part Three, a set of blank worksheets for local officials to use when
collecting cost information. Because of computerization, we recommend that local officials design
their own worksheets, using the formats, or similar ones, displayed in the Case Study.
If you have any questions or would like assistance in costing your municipal services, we urge you to
contact us:
MUNICIPAL DATA MANAGEMENT AND
TEL: (617) 626-2300
TECHNICAL ASSISTANCE BUREAU
FAX: (617) 626-2330
DIVISION OF LOCAL SERVICES
Web Site: www.mass.gov/dls
P. O. BOX 9569
BOSTON, MASSACHUSETTS 02114-9569
COSTING MUNICIPAL SERVICES
PAGE
Part One:
A Guide to Costing Municipal Services ……………………………………………………………….. 1
Part Two:
Masstown Ambulance Service, A Case Study ……………………………………………………. 20
Bibliography
……………………………………………………………………………………………………………………. 40
Revised 3/2005
Costing Municipal Services: Workbook and Case Study
Introduction
Department of Revenue
Division of Local Services
A GUIDE TO COSTING MUNICIPAL SERVICES
What is the full cost of collecting and disposing of trash in your community? How much does
it cost to provide fire protection?
What would it cost to increase service levels? How much could be saved by reducing
services?
If you charge fees for municipal services, what percentage of the cost of service do they
cover? Under what circumstances should fees be increased?
Could some municipal services be provided more efficiently by private firms?
As a local official – whether you are a mayor or selectman, manager or executive secretary, auditor or
accountant, department head, member of the finance committee or any other member of municipal
government – you may have asked these or other questions related to the cost of municipal services.
Costing is a management and policymaking tool that helps to answer these questions. It differs from
traditional municipal budgeting and accounting in three ways:
1. Costing looks at the cost of all resources used to provide services rather than expenditures
made to operate municipal departments;
2. Costing includes all costs of providing a service, not just those found in the budget or financial
reports of the department responsible for the service;
3. Costing focuses on the cost of the resources used to provide a service during a given period
of time, regardless of when cash disbursements are made to purchase these resources.
The purpose of costing is not simply to collect cost data, but to provide municipal managers and
officials with information they can use to make better management decisions in several areas:
•
Analyzing the efficiency of municipal services
•
Making budget decisions
•
Setting fees for services and determining intergovernmental charges
•
Choosing among alternative methods of providing services, such as contracting or
regionalization
Costing is as much an art as a science. There are relatively few established rules to follow, and there
is considerable leeway for judgment. In this Guide, we introduce the basic concepts and techniques
of costing, which we feel meet the needs of most local officials. More complex approaches to costing,
which provide greater accuracy but also require greater effort, are discussed in the books listed in the
Bibliography at the end of this Workbook.
The costing process presented in this Guide has four major steps, each of which is explained by a
series of questions and answers. The four steps and the questions addressed under each are listed
below.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
STEPS IN THE COSTING PROCESS
Step 1
Deciding What to Study
Pages 3-5
Questions:
What service do I want to cost?
What is the purpose of costing this service? What information do I
need to collect?
How can the service be measured?
Step 2
Getting Organized
Questions:
How do I organize a cost study?
Pages 6-9
What time period should a cost study cover?
Where will I find cost figures?
Do I need to distinguish between expenses and expenditures?
How should I treat pension costs?
When is productive time important in costing?
Step 3
Collect Cost Information
Pages 10-15
Questions:
What resources are used in providing a service?
What are direct and indirect costs?
How are indirect costs allocated to services?
When should I make a distinction between variable and fixed
costs?
Step 4
Using Cost Information
Questions:
Are services provided efficiently?
Are correct budget decisions being made?
How should fees and intergovernmental charges be set?
Should alternative methods of providing services be considered?
What are the limits to costing?
Costing Municipal Services: Workbook and Case Study
Pages 16-19
2
Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
STEP 1: DECIDING WHAT TO STUDY
Q. What services do I want to cost?
The first step in costing is to specify which service or services are to be costed.
Example:
All services performed by the highway department.
Example:
A service provided internally to various town departments, such as centralized
purchasing.
Q. What is the purpose of costing this service? What information do I need to collect?
It is important at the beginning of a cost study to specify the purposes of the study, the information
to be collected, and how the information will be used. How the information is to be used will
determine the cost data to be collected; different uses require analyzing different types of costs.
Table I lists types of cost analyses, the questions they answer, and an example of each.
Example:
The recreation department wants to know at what level program fees would have to
be set in order to recover one-half of the cost of providing a particular program to
1000 users. In order to calculate the program’s cost per participant (average unit
cost), the department needs to calculate the full cost of the program and divide this
amount by the number of participants.
TABLE I: TYPES OF COST ANALYSES, THEIR USES, AND EXAMPLES
Questions to be Answered
Full Costs
What is the cost of all resources
used to provide the service?
Average Unit Costs
What cost should be the basis for
setting fees?
Job Costs
What is the cost of performing one
job?
Incremental Costs
What would it cost to expand the
service?
Avoidable Costs
What costs would be avoided if some
or all of the service were dropped, or
if a different service delivery method
(e.g., contracting) were used?
Costing Municipal Services: Workbook and Case Study
3
Example
Landfill — the cost of all resources,
from all departments, needed to
provide landfill service.
Town Clerk — the cost processing
one marriage license.
Vehicle Repair — the cost of repairing
a vehicle.
Libraries — the additional costs of
opening a branch library two
evenings per week?
Fire — costs that would be saved if
an existing fire station were closed.
Ambulance — costs that would be
saved by contracting for the service.
Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
Q. How can the service be measured?
Once the service being costed and purpose of the study have been identified, it is important to
consider how the output and cost of the service can be measured. We use the term output to
describe the amount of a service provided by a local government. Measures of output and cost
vary with the nature of the service being costed.
For services whose output is reasonably standard from case to case, output can be measured as
the total of all units of service provided. A unit of output is simply one instance of the service,
and unit cost is the average cost of providing one unit of service.
Cost of Services
÷
Number of units of output
=
÷
=
Unit Cost
Example:
$1,900
(total cost of voter
registration)
250
(number of voters
registered)
$7.60
(cost of registering one
voter)
For municipal services which are one-time jobs or for which the effort required varies greatly from
job to job, units of output are not standard and average unit cost is not a useful measure; a more
meaningful calculation is the cost of each job or a range of costs per job.
Example:
Installation of a new data processing system.
Example:
The time required for criminal investigation by the police department varies from 4
hours to 30 hours per case. The Department estimates that one hour of investigation
costs $17.50. Therefore, the cost per case ranges from $70 (4 x $17.50) to $525 (30
x $17.50).
The key to defining output and unit costs is to choose measures, which provide useful information
for the particular study being conducted. Table II on the following page lists possible measures of
output and unit cost for different types of services.
Example:
In analyzing the cost of road plowing, we are likely to be more interested in the cost
per lane-mile than the cost per road paved. The cost per road paved varies greatly
with the length and width of the road. In contrast, calculating the cost per lane-mile
allows us to estimate average plowing costs for the town as a whole.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
TABLE II: EXAMPLES OF SERVICES, MEASURES OF OUTPUT, AND UNIT COSTS
Service
Output
Unit Cost
Road Paving
Lane-miles paved
$ per lane-mile
Street Repair
Square yards of street repaired
$ per square yard
Water
Gallons of water delivered
$ per gallon
Fire Protection
Protection of property & lives
$ per hour of protection
provided
Police Protection
Police patrols
$ per hour of patrol
Accident Reports to
Insurance Companies
Number of reports completed
$ per report
Recreation Programs
Number of people served or
programs offered
$ per participant or $ per
program
Immunization
Number of immunizations
$ per immunization
Payroll Processing
Number checks
$ per check
Tax Billing
Number of bills
$ per bill
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
STEP 2: GETTING ORGANIZED
Q. How do I organize a cost study?
Successful costing requires a team effort by department heads, employees, and town officials.
Before any data is gathered, all people involved in the study need to understand the purpose of
the study and their role in it.
Study guidelines should be put in writing. These guidelines specify what information is to be
collected, who is to collect it, sources of information to be used, and the assumptions underlying
the study. Standard forms for collecting cost data also need to be prepared.
Q. What time period should a cost study cover?
The answer to this question depends on the purpose of the study. If its goal is to determine the
annual cost of providing a service, cost information will be needed for an entire fiscal year.
However, the study need not be carried out over the whole year. Data from the most recent fiscal
year can be collected and estimates made of subsequent changes in costs, or figures on current
service levels and costs can be collected over a short time period and an estimate of yearly costs
derived from them.
Example:
A community wants to determine the full cost of its library services. Costs are found
in the expenditure reports for the fiscal year just completed, and likely changes in
current year costs are estimated.
To find the cost of its road repair program, the public works department sets up a
special cost study. Department employees keep track of the labor, material, and
equipment used for road repairs over a two-week period. Since the level of activity
during these two weeks is typical of activity for the year as a whole, the annual cost
of the program can be derived from the costs incurred during the time of the special
study.
If the purpose of the study is to look at cost trends over a number of years, past and current costs
need to be collected, and estimates made of future costs. When the purpose of the study is to find
the cost of a single project, information is collected for the time period over which the project is
carried out.
Example:
The public works department wants to know the cost of plowing and cleanup after a
recent snowstorm. Records for the two weeks in which the work was done are
examined to find costs related to this project.
Q. Where will I find cost figures?
The primary source of cost data is expenditure records: general and subsidiary ledgers, warrants
for payments, debt service records, and expenditure reports. Information is also contained in
budgets and non-financial records such as equipment purchase and maintenance records,
building records, mileage reports, and payroll and personnel records.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
The ease with which cost information can be collected will depend on the level of detail in
municipal expenditure records and budgets.
Example:
The police department wants to know the cost of its routine patrols. If department
records report separately the costs that go into providing this service (personnel,
equipment usage, and vehicle mileage), then calculating its cost is relatively easy.
However, it is likely that patrol costs are not reported separately; in this case, officials
will need to estimate costs based on existing records or conduct a study of current
costs over a short period of time.
Q. Do I need to distinguish between expenses and expenditures?
Expenses:
The costs of resources used to provide a service over given period of time.
Expenditures:
The cash transactions made when purchasing these resources.
Costing requires that the expenses incurred to provide a service be calculated for the time period
in which the service is provided, regardless of when the expenditures necessary to purchase
these resources take place. Thus, the financial analysis used in costing differs from the cash
accounting system used by most municipalities, in which expenses are recognized only when
expenditures are made.
For costing purposes, the relationship between expenses and expenditures is one of the three
types:
1. Expenditures made in the same time period in which expenses are incurred.
Example:
Municipal employees are usually paid on a weekly or biweekly basis for hours
worked in the previous one or two weeks. Over the course of a fiscal year, there
is no significant difference between the amount paid to employees (expenditure)
and the cost of personnel resources used (expense).
2. Expenses incurred before expenditures are made.
Example:
A sidewalk repair bill submitted by a contractor in August 1998 for work done in
June of that year should be considered an expense for the 1998 fiscal year, even
though the expenditure is made in the 1999 fiscal year.
3. Expenses incurred after expenditures are made.
This situation occurs when an asset is used after its purchase has been completed. The
general principle to be followed in costing the asset is to distribute its cost over its
expected useful life.
Example:
A police car is purchased for $15,000 at the beginning of fiscal year 1999, and is
expected to be used for three years. The annual cost of the vehicle is $5,000
($15,000 ÷ 3).
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
Long-term assets financed through debt service, typically buildings, roads, and very expensive
pieces of equipment, are also costs for which the expense occurs after the expenditure.
According to the principle of distributing costs over the life of an asset, the construction or
purchase cost of this type of asset should be considered an expense over its expected useful life.
However, it is often difficult to predict accurately a long-term asset’s expected useful life.
We recommend that municipalities spread the construction or purchase cost of a long-term asset
over its useful life. The useful life of the asset may be determined by using the Internal Revenue
Service regulations for depreciation. Otherwise, the cost can be spread over the life of the debt
service, by using principal payments as the yearly cost.
Interest payments are also a cost of funding the purchase of long-term assets. Generally, they are
recorded as an expense in the year in which they are paid, although for debt service with larger
interest payments in initial years than in later years (as occurs in Massachusetts), this method
results in an uneven distribution of costs over the useful life of the asset.
Example:
A fire station built at a cost of $5,000,000 (excluding interest) has a useful life of 30
years. $5,000,000 divided by 30 is $166,666, which for costing purposes is the
yearly expense of the building. Interest payments, which are declining over the debt
payment period, are recorded as an expense in the year they are paid.
Q. How should I treat pension costs?
The full cost of services provided in any year ought to include employees’ pension costs. Each
community annually contributes to its retirement system. The community’s annual contribution is
based on an actuarial study approved by the Public Employees Retirement Administration
(PERA). Generally, the annual contribution provides for the current retirees’ pension costs and
the active employees’ accumulated pension benefits. As conditions change (e.g., layoffs, new
hires, changes in the salaries of the community’s current employees), a community revises its
actuarial study, adjusting the contributions to its retirement system. Once the community’s annual
contribution is established, the pension costs of any one department can be allocated based on
the ratio of active employees’ salaries in that department as a percent of total salaries of all
employees contributing to the retirement system.
Example:
To determine the full cost of providing ambulance service, a community needs to
include an estimate of pension costs for ambulance service. The pension cost for
ambulance service is apportioned based on the proportion of ambulance-related
salaries to the salaries of all community employees participating in the retirement
system. Current salaries of ambulance personnel total $45,400 while the salaries of
all employees participating in the retirement system total $1,680,047; therefore the
ratio is calculated to be 2.7 percent ($45,400 ÷ $1,680,047). This ratio is then
applied to the current pension assessment of $210,000, yielding an estimate of
$5,675 (2.7% of $210,000).
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
Q. When is productive time important in costing?
Productive time is the number of hours actually worked by a municipal employee, rather than the
number of hours for which the employee is paid. The cost of productive time is calculated by
dividing the employee’s annual cost by the number of productive hours. What figure should be
used for productive hours? Although a full year’s work might be considered 2080 hours (8
hours/day x 5 days/week x 52 weeks/year), employees do not work many of these hours.
Vacation days, paid holidays, lunch and coffee breaks, and sick leave used all reduce the number
of productive hours worked during a year.
Example:
A municipality wants to determine the hourly cost of the town engineer’s productive
time. His annual cost is $45,000 (salary, benefits, and pension cost), or $21.63/hour,
based on a year with 2080 hours. However, with two weeks of paid vacation, ten
paid holidays, five days of sick leave used, and 30 minutes/day of paid breaks,
productive hours worked are 1,762.5/year. The hourly cost of the employee’s
productive time is $25.53 ($45,000/1,762.5 hours), which is 18 percent higher than
the full yearly rate.
Precise calculation of the cost of productive time can be difficult, particularly when accounting for
accrued sick leave and vacation time. For costing studies in which average unit costs or job costs
must be determined, officials need only be aware that there is a difference between paid and
productive time and account for the major factors which affect productive time.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
STEP 3: COLLECTING COST INFORMATION
After the cost study has been defined and organized, the third step in the costing process is to collect
the costs of the resources used to provide the service.
Q. What resources are used in providing a service?
Before the costs of a service can be collected, the resources needed to provide the service must
be identified. These resources are labor, supplies, equipment, facilities, and purchased services.
Most resources are provided by the department responsible for the service.
Example:
The police department is responsible for the personnel, equipment, and supplies
needed to provide police services.
Some resources, however, may be provided by other departments.
Example:
Purchasing by a centralized purchasing department, or building maintenance by a
central building department.
Example:
Townwide administration by the mayor or board of selectmen.
To identify all resources used to provide a service, all areas of local government activity must be
examined to determine which are used in some way to provide the service. Once these resources
have been identified, their costs can be collected.
Q. What are direct and indirect costs?
The total cost of resources used to provide a service is made up of two elements — direct costs
and indirect costs. Table III on the next page illustrates the types of direct and indirect costs, and
the following pages describe each type of cost.
DIRECT COSTS:
Costs clearly identifiable and readily attributable to the service being
costed.
Most direct costs are found in the relevant department’s operating budgets as salaries and wages,
capital outlay, purchase of services, and other expenses. Sometimes, however, direct costs of
one department are found in the budgets of other operating departments.
Example:
The Public Works Department cleans and mows parks used by the Recreation
Department for its outdoor programs. Part of this cleaning and mowing cost is a
direct cost attributable to the services provided by the Recreation Department.
INDIRECT COSTS:
Costs not readily attributable to a service or department, because they
are shared with other services or departments.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
TABLE III: TYPES OF DIRECT AND INDIRECT COSTS1
Direct Cost:
Clearly identifiable and
Own Department
E.g., salaries of personnel running the youth program; supplies used in the
attributable to specific
service or department.
program.
Other Departments
E.g., mowing of recreation department fields by the public works
department.
Indirect Cost:
Indirect Operating Costs
Not readily attributable
to a specific service or
E.g., cost of recreation department offices in town hall. Because the town
hall is used by many departments, the share of its cost attributable to the
budget.
recreation department is not found separately in any budget or accounting
data. Therefore, it is calculated as an indirect cost.
Indirect Administrative Costs
Government-wide — E.g., costs of townwide administration by town
manager, which benefits all town departments.
Departmental — E.g., administrative costs of the recreation department
which cannot be readily attributed to individual recreation department
programs.
There are two types of indirect costs:
Indirect Operating Costs: Costs of services which are not provided to the public, but which
support other municipal departments. These are centrally budgeted costs of operating
municipal government.
Example:
Buildings shared by more than one department
Central motor pool
Townwide liability insurance
Indirect Administrative Costs: Shared costs of management and policymaking that cannot
be assigned to individual services of departments.
Government-wide administrative costs are those shared by all municipal departments.
Example:
board of selectmen or city council
town manager or mayor
town accountant or city auditor
town counsel or legal department
treasurer/collector
assessors
1 The examples used here refer to a youth program run by a municipal recreation department.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
Individual departments may also have indirect administrative costs that they cannot trace
clearly to the services they provide. An example is the cost of a police chief’s time spent in
general management of the police department. Because departmental indirect costs are not
large in most cases, and because they increase the complexity of the costing process, we do
not discuss them further in this Guide.
The reason for distinguishing between direct and indirect costs is to help identify all costs of
providing services. Each local government that does costing will categorize its direct and indirect
costs differently, depending on how services are organized and how easily costs can be traced to
them.
Example:
If the police department is located in its own building, the building cost is direct. It is
readily attributable to the services provided by the police department. On the other
hand, if the police department shares space in the town hall with other departments
and it is not possible to measure directly each department’s share of the cost of the
facility, building costs are an indirect cost of police services. Although the cost of
office space cannot be traced directly to the police department, it is still a necessary
cost of providing police services.
REMEMBER: There is no single correct way to categorize a cost as direct or indirect. What is
important is to:
•
Set reasonable guidelines to decide if a cost is direct or indirect
•
Be consistent in categorizing costs as direct or indirect
•
Count every cost, but only count it once
Q. How are indirect costs allocated to services?
Although indirect costs are not easily attributable to individual services they are still an essential
part of the cost of municipal government, and it is important to include them in the full cost of
providing municipal services. For this reason, indirect costs are allocated to departments and
services according to the amount of the indirect costs for which they are responsible.
Indirect costs are distinguished from direct costs by the fact that they cannot be assigned precisely
to various municipal activities. As a result, the indirect costs allocated to a particular department
or service are approximate rather than exact costs. Sometimes, this fact bothers officials who like
to have precise cost figures. It is important to remember that even though indirect costs are
approximations, including them in the full cost of municipal services results in more accurate cost
information than if they are not included at all.
This Guide discusses allocation methods which are relatively easy to use and which meet the
costing needs of most municipalities. Local officials who feel that more precise allocation of
indirect costs will result in significantly better cost information should consider using the more
complex allocation methods discussed in the books cited in our Bibliography.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
Allocating indirect costs is a two-step process:
First, indirect costs are calculated and combined into one or more cost pools. We use the
term “cost pool” to describe a collection of indirect costs to be allocated.
Second, the basis for allocating cost pools is determined, and dollar amounts are
calculated and assigned to individual services.
These steps are explained in more detail below.
First Step: Forming Cost Pools
Officials doing a cost study must decide which of the indirect operating and administrative
costs are to be pooled. A useful guideline for this decision is to pool all costs which are
relevant to the costing issues being considered. Remember to specify in the study which
costs are included, and why.
Example:
If a cost study is being done to find out the additional cost of keeping recreational
facilities open for several extra hours per week, indirect administrative costs are
not likely to be affected, and need not be included. On the other hand, indirect
operating costs (e.g., facility maintenance and fee collection) might well
increase, and therefore should be considered.
Second Step: Allocating Cost Pools
Once direct costs are pooled, they are allocated to individual departments or services
according to the department’s or service’s percentage of the following.
•
The municipality’s direct personnel costs; or
•
The municipality’s number of employees; or
•
The municipality’s total direct costs.
The allocation base used should be the one which most accurately allocates indirect costs to
the services or departments. Since personnel represent the largest single portion of municipal
costs, personnel costs or numbers are logical choices for an allocation base. If equipment and
building cost are a substantial percentage of costs, it is also reasonable to use total direct
costs as the basis for allocating indirect costs.
Example:
The landfill is responsible for 8 percent of the town’s direct personnel costs;
therefore, it is allocated 8 percent of townwide indirect costs.
A somewhat more accurate, but also more complex, method of allocation uses several
different indirect cost pools, depending on the type of cost.
Example:
Indirect building construction and maintenance costs, indirect personnel
administration costs, and indirect costs of vehicles are collected into separate
cost pools. Costs in each pool are then allocated according to a different base:
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
building costs according to the percentage of space occupied; personnel costs
according to the percentage of personnel numbers or costs; and vehicle costs
according to the number of vehicles used by each department or service.
Sometimes, an indirect cost pool must be formed for an indirect cost shared by only a few
departments.
Example:
The fire and police departments occupy one building; costs of operating this
building, which are indirect costs to the fire and police departments, are allocated
only to these two departments.
Q. When should I make a distinction between variable and fixed costs?
So far, we have looked at costs as either direct or indirect, depending on our ability to link them to
the service being costed. It is useful also to remember that different costs change differently with
increases or decreases in service levels. Using this distinction, we can classify costs as follows.
•
Variable Costs
•
Fixed Costs
•
Stepped Costs
Variable Costs:
Change directly and proportionally with the amount of service being
provided.
Example:
The cost of asphalt used by the Highway Department, which
changes with the miles of road being paved.
Fixed Costs:
Do not vary with a change in service levels.
Example:
The cost of operating and maintaining the Highway
Department building generally does not change with
increases or decreases in miles of road paved.
Stepped Costs:
Within a given level of service, they do not change, but with large
increases or decreases in service, they change in relatively large
amounts.
Example:
The cost of equipment used in road paving does not change
with small increases in miles of road paved. However, if a
large number of additional miles of road are to be paved,
additional equipment will have to be purchased; equipment
costs will thus increase in a large single step and be fixed at
a new, higher level.
Many direct costs are variable costs, primarily materials, supplies, and hourly labor costs. They
are attributable to the service being provided and they vary directly with the level of service.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Example:
Division of Local Services
Fuel, oil, and maintenance costs of police department vehicles are direct, variable
costs. The purchase cost of the vehicles is also a direct cost, but it is fixed, because
it does not change with changes in the level of service provided.
Indirect costs are often fixed or stepped. They do not change when services are expanded or
contracted, unless large expansions or contractions take place.
Example:
The cost of centralized payroll accounting for a library is the same whether the library
is open five or seven days per week. However, if library hours are extended enough
that new personnel must be hired, payroll accounting costs will rise and be fixed at a
higher level.
The differences between variable, fixed, and stepped costs are important when we look at
incremental and avoidable costs — costs which change with increases or decreases in service
levels.
Example:
The highway department plans to pave 10 more miles of road this year than last.
Variable costs will be the additional cost of hourly labor, paving materials, fuel, and
equipment maintenance. If no new equipment is needed, equipment costs will be
fixed; if new equipment must be purchased, this cost will be a stepped cost.
Similarly, if the highway department reduces its road paving by a small amount, only
the variable costs will be avoidable. Unless the equipment used for road paving can
be sold or used on other projects, its cost is fixed; that is, it will not change regardless
of decreases in road paving activity.
Costing Municipal Services: Workbook and Case Study
15
Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
STEP 4: USING COST INFORMATION
As stated earlier in this Guide, the purpose of costing is not simply to collect cost information, but to
use this information to make better management and policy decisions in several areas.
•
Analyzing the efficiency of municipal services
•
Making budget decisions
•
Setting fees for services and determining intergovernmental charges
•
Choosing among alternative methods of providing services
In the following pages, we discuss how different types of costs can be used for these purposes.
Remember that each costing situation is unique, and must be analyzed individually to determine
which types of costs are relevant to it. The guidelines presented here are general ones designed to
help local officials use their own judgment in determining which costs are applicable to their costing
needs.
Analyzing the efficiency of municipal services
Service efficiency means providing a service for the lowest possible cost. Cost information is used
to answer a variety of questions about service efficiency.
What factors make the cost of a service unusually high?
Example:
The head of the recreation department feels that the cost of materials used in
recreation programs is high relative to other program costs. Costing helps to
identify and explain these costs, so that the program manager can take corrective
steps, if necessary.
Why has a cost changed?
Example:
The board of selectmen notices a large increase in the public works department’s
labor costs, and is concerned that labor productivity has dropped. A costing study
reveals that the department is now doing maintenance work at schools which
used to be done by school department employees. As a result, labor costs in the
public works department have risen and those in the school department have
dropped. The amount of work being performed has not changed.
Have unit costs changed?
Example:
A town’s treasurer/collector feels that the cost of issuing tax bills has risen. After
collecting information on the number of bills issued and the costs of issuing them,
he finds that unit cost (the cost of issuing one bill) has actually dropped, because
of streamlined procedures adopted recently. Total costs have risen because of a
large increase in the number of taxpayers, due to new commercial and residential
development.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
In analyzing service efficiency, it is important to distinguish between the efficiency and
effectiveness of services. Efficiency means providing a service at the lowest possible cost,
while effectiveness refers to the quality of the service and how well it is meeting its objectives.
Example:
The cost of municipal water service rises dramatically in one year, raising
questions about its efficiency. However, further investigation reveals that a new
purification system was installed during the year which provides cleaner water.
Thus, the water department is delivering a more expensive service, but one which
better meets the need of citizens for pure water.
Making budget decisions
In making budget decisions, officials are interested in many of the issues of efficiency discussed
above. In particular, year-to-year cost comparisons reveal changes in costs, while the breakdown
between direct and indirect costs indicates which costs and departments relate directly to the
service, and which are needed to support it indirectly. When changes in service levels are being
considered, incremental and avoidable costs are important.
Officials may be asking a variety of costing questions when making budget decisions.
•
Why has the cost of service changed from last year?
•
How can I justify to voters an increase in next year’s budget for a particular service?
•
How much money can be saved if a particular service is reduced? How much will it cost to
increase a service?
Setting fees for services and determining intergovernmental charges
In order to determine fees for municipal services, officials need to know the amount of service
provided and the cost of one instance of service.
Example:
The charge for one immunization by the health department is based on average unit
cost, since the output and cost of this service is relatively uniform from case to case.
In contrast, the cost of building inspections varies greatly with the size and complexity of the
building project. As a result, inspection fees are based on the actual cost of inspecting each
project or on the dollar value of the project.
Pricing municipal services is a complex task, and we urge officials who use costing for this
purpose to consult one of the books on pricing and user fees listed in the Bibliography. Some of
the issues to be considered in setting prices are the following.
1. Statutory restrictions
State laws or local ordinances may specify the fee to be charged, place a ceiling on it, or
establish a range within which the fee must be set.
Costing Municipal Services: Workbook and Case Study
17
Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
Example:
State law prohibits libraries from setting general user charges for library
services, although fees may be set for specific services.
2. Costs to be recovered
Example:
Should fees for recreation programs be set to recover all direct and indirect
costs associated with them, or only the direct costs of operating the programs?
Officials should keep in mind the guideline “just and equitable” when setting
fees.
3. Equity
Example:
Will an increase in health department fees mean that low-income and elderly
citizens, who most need the department’s services, will not be able to afford
them? If so, a reduced fee to these citizens may be worth consideration.
4. Collection costs
Example:
A decision is made to charge a landfill fee each time citizens use it. As a result,
another employee must be hired to collect fees and issue receipts. The
additional cost of collecting the fees may be more than the fee revenue
collected.
5. Negative effects of charging for municipal services
Example:
When user fees at the landfill are increased sharply, officials may notice an
increase in illegal dumping.
When two or more units of governments share costs, costing helps to determine full costs and
identify formulas by which costs can be divided.
Example:
Four towns share a swimming pool. A cost study is conducted to determine both the
direct costs of the pool and the cost of resources provided indirectly by each town.
Data collected on use of the facility by residents of the four towns is used to
determine the portion of costs to be paid by each local government.
Choosing among alternative methods of providing services
Avoidable and new costs are important factors in choosing among alternative methods of
providing services.
Example:
In considering a change from trash collection by municipal employees to collection by
a private contractor, officials need to determine which costs the town will avoid and
what new costs will be incurred if the contract is accepted. If avoidable costs are
greater than new costs, then the contract offers financial savings to the town. If, on
the other hand, avoidable costs are less than new costs, the change in service
delivery does not offer financial savings.
Costing Municipal Services: Workbook and Case Study
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Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
When comparing avoidable and new costs, make sure that the costs being compared are for
comparable services.
Example:
A contract for trash collection may not include collection of furniture and other large
items, as the existing municipal service does. If not, the contract contains a hidden
cost, since the town or private citizens will have to pay separately for collection of
these items.
Conclusion — The limits to costing
Although costing is a very useful tool for municipal managers and policymakers, it is important to
remember that it represents only one aspect of decision-making. Other factors also must be
considered in any decision.
•
Local traditions: How have services been provided in the past?
•
Political acceptability: Will a change be acceptable to both providers and users of the
service?
•
Legal constraints: Is the change permissible under the laws of the Commonwealth?
•
Employee relations: Does the municipal labor contract allow the change?
Example:
A costing study shows that trash collection services could be more efficiently
provided by a private contractor. However, the service has always been provided by
municipal employees, and workers, taxpayers, and the head of the public works
department prefer the current system of collection. Furthermore, the townwide labor
contract makes layoffs very difficult. In this situation, cost information is one of
several considerations to be weighed in choosing the most effective method of trash
collection. The value of the cost information is that it sheds the light of objective
financial analysis on a situation complicated by many political and subjective factors.
Costing Municipal Services: Workbook and Case Study
19
Part One: A Guide to Costing Municipal Services
Department of Revenue
Division of Local Services
PART TWO: MASSTOWN AMBULANCE SERVICE, A CASE STUDY
STEP 1: DECIDING WHAT TO STUDY2
Assume that you are a town official in Masstown, a community of 30,000 people. The board of
selectmen has asked you for answers to three questions about the town’s ambulance service.
1. What is the full cost of providing ambulance service in Masstown?
2. How much of the full cost of the service is covered by revenue from fees being charged?
3. A private ambulance service has offered to take over Masstown’s emergency ambulance
service for $150,000 per year. Would Masstown save money if it accepted this offer?
STEP 2: GETTING ORGANIZED
The board of selectmen has organized a group of local officials to conduct the study, including the
town manager, Accountant, treasurer/collector, and fire chief. This group has decided to look at cost
figures for FY1, the latest year for which complete data are available; where necessary, FY1 figures
will be adjusted for estimated changes in current or future costs.
The following facts about the current ambulance service have been collected:
•
Service Provided: 24-hour emergency ambulance service;655 runs made in FY1
•
Organization: part of the fire department.
•
Location: Masstown’s fire Station; service provided to local hospital only.
•
Personnel: eight EMTs who are also trained as firefighters.
•
Fee: $120 per run (fee was set to match the base rate determined by Medicare and Blue
Cross). The policy of the board of selectmen has been that ambulance fees should cover 25
percent of total costs of the service.
STEP 3: COLLECTING COST INFORMATION
Most resources used to provide this service are provided by the fire department, where the service is
located. A few other town departments also provide resources:
•
Treasurer/collector: bills and collects fees. On average, 70 percent of fees billed are collected.
•
Town accountant: handles payroll, benefits, and insurance.
•
Building Department: cleans and maintains fire station.
A number of different Worksheets have been used to collect cost information on the ambulance
service. They show each cost, the account where the cost is found, and how it is calculated.
2 For the sake of brevity, a number of simplifying assumptions about ambulance service in Masstown have been made. The importance of the Case
Study is not the facts presented about Masstown and it ambulance service, but the concepts and techniques of costing, which it illustrates.
Costing Municipal Services: Workbook and Case Study
20
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Worksheet I
Direct and Indirect Service Inputs
22
Worksheet IIA
FY1 Personnel Costs
23
Worksheet IIB
FY1 Equipment and Supply Costs
24
Worksheet IIC
FY1 Facility Costs
25
Worksheet IID
FY1 Other Costs
26
Worksheet III
Summary of Total Costs
27
Costing Municipal Services: Workbook and Case Study
21
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
WORKSHEET I: DIRECT AND INDIRECT SERVICE INPUTS
Personnel
Direct Inputs
Indirect Inputs
Salaries and Wages
Pensions
Holiday, Overtime Pay
Fringe Benefits
Supervision by fire chief
Equipment & supplies
Ambulance
Maintenance
Vehicle Supplies
Ambulance Insurance
Communication Equipment
Service-Related Supplies
Facilities
Capital Plant & Outlay
Utilities
Building Insurance
Maintenance
Other
Training
Treasurer/collector:
Billing & Fee Collection,
Salaries & Wages
Town accountant:
Administration of Payroll,
Benefits, & Insurance
Costing Municipal Services: Workbook and Case Study
22
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
WORKSHEET IIA: FY1 PERSONNEL COSTS
Type of Cost
Direct Cost
Indirect Cost
Name of account
where cost is found
Calculation
1.Salaries & Wages
Each EMT has a
different salary; total
is $162,752
$162,752 (1a)
$ 0 (1b)
Sum of payments is
$3,820
3,820 (2a)
0 (2b)
3.Fringe Benefits
Benefits for 8 EMTs
total $29,295
29,295 (3a)
0 (3b)
4.Supervision
Fire chief estimates
15% of his time is
spent supervising
ambulance
personnel. Chief’s
yearly salary and
fringe benefits total
$42,900. 15% of
$42,900 = $6,435.
6,435 (4a)
0 (4b)
• Permanent
positions
FY1 Cost
Calculation
FY1 Cost
• Temporary
positions
2.Additional pay
• Overtime
• Other
• Salaries & Wages
• Fringe benefits
Pension costs for ambulance service
are apportioned based on the
proportion of ambulance-related
salaries ($162,752, Line a) to the
salaries of all town employees
participating in the retirement system
($4,285,800). This ratio, 3.8%, is then
applied to the FY1 pension
appropriation of $600,000. 3.8% of
$600,000
22,785 (5b)
5.Pensions
0 (5a)
6.Other Personnel
Costs
0 (6a)
0 (6b)
7.Total Personnel
$ 202,302 (7a)
$ 22,785 (7b)
8.Grand Total, Personnel Costs
$ 225,087 (8)
(Line 7a + Line 7b)
Costing Municipal Services: Workbook and Case Study
23
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
WORKSHEET IIB: FY1 EQUIPMENT & SUPPLY COSTS
Type of Cost
Direct Cost
Indirect Cost
Name of account
where cost is found
Calculation
1.Equipment capital
cost
Ambulance was bought 2
years ago for $40,000, and is
expected to last 5 years.
$40,000 ÷ 5 = $8,000
$ 8,000 (1a)
$ 0 (1b)
4 repairs in FY1: $252, $635,
$228, and $430. Total of 4
bills =$1,545
1,545 (2a)
0 (2b)
3.Equipment
Supplies
1,883 gallons of gasoline
used at average price of
$1.08/gallon. 26 quarts of oil
used at $1.00/quart. 1,883 x
$1.08 = $ 2,034 and 26 x
$1.00 = $ 26. Sum is $2,060
2,060 (3a)
0 (3b)
4.Equipment
Insurance
Town accountant maintains
policy; $1,100 premium.
1,100 (4a)
0 (4b)
5.Service-related
Supplies
Blankets $95, oxygen $900,
medical supplies $250. Total
of 3 items is 1,245
1,245 (5a)
0 (5b)
6.Other equipment
& supply costs
Fire department has $750
yearly contract to maintain
communication equipment for
ambulance service.
750 (6a)
0 (6b)
$ 14,700 (7a)
$ 0 (7b)
• Capital Items
• Principal &
interest payments
2.Equipment &
Maintenance
• Repairs &
maintenance
FY1 Cost
Calculation
FY1 Cost
• Insurance
premiums
Total Equipment &
Supplies
7.Grand Total, Equipment & Supply Costs
$ 14,700 (8)
(Line 7a + Line 7b)
Costing Municipal Services: Workbook and Case Study
24
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
WORKSHEET IIC: FY1 FACILITY COSTS
Type of Cost
Direct Cost
Name of account
where cost is found
Calculation
1.Capital Plant &
Outlay3
Indirect Cost
FY1 Cost
Calculation
$0 (1a)
Masstown makes $100,000 principal
payments on the fire station; FY1
interest costs are $20,000. Building
has 90,000 square feet, of which
ambulance service uses 25%.
• Land
• Buildings
• Improvements
2.Utilities
0 (2a)
Utility charges for fire Station total
$1,740: $502 electricity, $926 heat,
$312 telephone, no water costs are
charged to ambulance service
because fire department is
responsible for essentially all water
usage in the fire Station. Ambulance
service is allocated 25% of the utility
charges. $1,740 x 25% = 435.
435 (2b)
0 (3a)
Cost of 2-year policy is $11,290;
25% of annual cost is allocated to
ambulance service. $11,290 ÷ 2 =
$5,645 x 25% =1,411
1,411 (3b)
0 (4a)
Central building Department
estimates 210 hours spent on fire
station, at hourly cost of $6.90. $235
spent on cleaning supplies. 25% of
costs are allocated to ambulance
service. 210 x $6.90 = $1,449;
$1,449 + $235 = $1,684 (total
maintenance cost) x 25% = $421
421 (4b)
• Non-energy
(telephone and
water)
• Insurance
premiums
4.Building
Maintenance
• Building repairs and
maintenance
• Custodial &
housekeeping
• Groundskeeping
5.Other Facility Costs
6.Total Facility
$ 30,000 (1b)
$100,000 + $20,000 = $120,000 x
25% = $30,000
• Energy (heat &
electricity
3.Building Insurance
FY1 Cost
0 (5a)
0 (5b)
$ 0 (6a)
$ 32,267 (6b)
7.Grand Total, Facility Costs
$ 32,267 (7)
(Line 6a + Line 6b)
3 Capital plant includes assets (building, streets, and major equipment) used and paid for over a number of years. Capital outlay includes assets used
longer than one year, but purchased in one year.
Costing Municipal Services: Workbook and Case Study
25
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
WORKSHEET IID: FY1 OTHER COSTS
Type of Cost
Name of account
where cost is found
Direct Cost
Calculation
1.Assessments
Indirect Cost
FY1 Cost
Calculation
FY1 Cost
$0 (1a)
$ 0 (1b)
1,150 (2a)
0 (2b)
0 (3a)
0 (3b)
• County
• State
• Other
2.Education
• Training
• Tuition
reimbursement
EMT refresher
course; trainer
was paid $1,150
• Dues &
subscriptions
3.Travel
• Instate
• Out of state
4.Indirect Operating
Costs
0 (4a)
Pool of indirect operating costs
includes billing and collection of fees
by treasurer/collector and
administration of payroll, benefits, and
insurance by town accountant. Pooled
costs of these departments include all
direct costs plus their share of indirect
costs. Pooled costs are $112,530
treasurer/collector + $98,760 town
accountant = $211,290. Cost pool is
allocated to services according to each
service’s share of the town’s total
direct personnel cost. Ambulance
service’s total direct personnel cost of
$202,302 (Line 7a, Worksheet IIA) is
2.5% of town’s total direct personnel
costs. Therefore, ambulance service
is allocated 2.5% of indirect operating
cost pool. 2.5% of $211,290 = 5,282
5.Indirect
Administrative
Costs
0 (5a)
Masstown has chosen not to
allocate indirect administrative
costs
6.Other Costs
0 (6a)
0 (6b)
7.Total Other
$ 1,150 (7a)
$ 5,282 (7b)
8.Grand Total, Other Costs
5,282 (4b)
0 (5b)
$ 6,432 (8)
(Line 7a + Line 7b)
Costing Municipal Services: Workbook and Case Study
26
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
WORKSHEET III: SUMMARY OF TOTAL COSTS
Direct Costs
1. Total Personnel
Indirect Costs
Sum of Direct &
Indirect Costs
$ 202,302 (1a)
$22,785 (1b)
$ 225,087 (1c)
14,700 (2a)
0 (2b)
14,700 (2c)
0 (3a)
32,267 (3b)
32,267 (3c)
1,150 (4a)
5,282 (4b)
6,432 (4c)
$ 218,152 (5a)
$ 60,334 (5b)
$ 278,486 (5c)
Costs (Line 7a, 7b,
8 Worksheet IIA)
2. Total Equipment &
Supply Costs (Lines
7a, 7b, 8,
Worksheet IIB)
3. Total Facility Costs
(Lines 6a, 6b, 7,
Worksheet IIC)
4. Total Other Costs
(Lines 7a, 7b,8,
Worksheet IID)
5. Total Costs
6. Less Revenues from fees
$ 55,060 (6)
655 runs x $120 fee/run = $78,600
$78,600 x 70% (average collection rate) = $55,020
7. Net Cost
$ 223,466 (7)
Full Cost (Line 5c) – Revenue from fees (Line 6)
Costing Municipal Services: Workbook and Case Study
27
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
STEP 4: USING COST INFORMATION
Based on the cost information collected above, we can answer the questions raised by the board of
selectmen.
1. What is the full cost of providing ambulance service to Masstown?
For FY1, all direct costs plus a reasonable portion of indirect costs total $278,486 (Line 5c,
Worksheet III). When fee revenue of $55,020 (Line 6, Worksheet III) is deducted, the net cost of
service is $223,466 (Line 7, Worksheet III).
2. How much of the cost of the service is covered by the fee being charged?
There are a number of ways to analyze this relationship between costs and fees. Here, we want
to look at the percentage of total costs covered by fees:
•
Fee Revenue: $55,020 (Line 6, Worksheet III)
•
Full Cost: $278,486 (Line 5C, Worksheet III)
•
Percentage of Total Costs Covered by Fees: 19.8% ($55,020 ÷ $278,486)
The policy set by Masstown’s board of selectmen has been that ambulance fees should cover 25
percent of total costs of the service. Whether the fee should be raised or the policy changed is a
choice the board of selectmen can make based on the information provided by our costing
exercise.
3. Would Masstown save money by contracting out its ambulance service for $150,000 per
year, beginning in FY3? (Masstown would continue to set the fee at $120/run. The private
contractor would bill and keep all revenues from fees.)
To answer this question, we need to determine Masstown’s avoidable costs, that is, cost savings if
Masstown halts provision of ambulance service by town employees. These avoidable costs are
then compared with the new costs to Masstown if it accepts the private contract. Three steps are
necessary to make this comparison:
First Step: Estimate the FY3 cost of ambulance service if provided by town employees, using the
following information about cost and service trends in Masstown:
a. Personnel costs are estimated to rise 5.5 percent per year from FY1 to FY3.
b. Some costs are not expected to change over the FY1-3 period; these include building debt
service, equipment capital costs, the guaranteed maintenance contract on ambulance
communication equipment, and training.
c. All other costs are estimated to rise by 4 percent per year from FY1 to FY3.
d. The number of ambulance runs is rising by about 30 each year. In FY3, 715 runs are
projected, a 9 percent increase over the 655 runs made in FY1. Costs which will rise
Costing Municipal Services: Workbook and Case Study
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Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
proportionally with this increase in service are equipment maintenance, equipment
supplies, and service-related supplies.
The Exhibits on pages 30-34 calculate projected FY3 costs.
Exhibit IA
Projected FY3 Personnel Costs
30
Exhibit IB
Projected FY3 Equipment and Supply Costs
31
Exhibit IC
Projected FY3 Facility Costs
32
Exhibit ID
Projected FY3 Other Costs
33
Exhibit II
Projected FY3 Total Costs
34
Second Step: Determine FY3 costs which are avoidable. These avoidable costs represent the
savings Masstown would achieve if it halted provision of ambulance service by town employees.
Exhibit IIIA
FY3 Avoidable Personnel Costs
35
Exhibit IIIB
FY3 Avoidable Equipment and Supply Costs
36
Exhibit IIIC
FY3 Avoidable Facility Costs
37
Exhibit IIID
FY3 Avoidable Other Costs
38
Exhibit IV
Total FY3 Avoidable Costs
39
Third Step: Compare avoidable costs with the new cost to Masstown of accepting the private
contract. The new cost of accepting the contract includes both the amount of the contract and the
foregone revenues from ambulance fees which Masstown would no longer receive. If the savings to
Masstown (its avoidable costs) are less than the new cost of accepting the private contract, then the
contract does not offer net savings to Masstown. On the other hand, if savings (avoidable costs) are
greater than the cost of accepting the private contract, then the contract does save money for
Masstown.
This comparison is calculated in Exhibit V:
Exhibit V
Net Additional Cost to Masstown if
39
Private Contract is Accepted
Costing Municipal Services: Workbook and Case Study
29
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT IA: PROJECTED FY3 PERSONNEL COSTS
FY1
Direct Cost
Adjusted for FY3
1.Salaries & Wages
Up 5.5%/year
$162,752 (Line 1a,
Worksheet IIA)
$162,752 x 1.055 x
1.055
2.Additional pay
Up 5.5%/year
$3,820 (Line 2a,
Worksheet IIA)
$3,820 x 1.055 x
1.055
3.Fringe Benefits
Up 5.5%/year
$29,295 (Line 3a,
Worksheet IIA)
$29,295 x 1.055 x
1.055
4.Supervision
Up 5.5%/year
$6,435 (Line 4a,
Worksheet IIA)
$6,435 x 1.055 x
1.055
Indirect Cost
Projected FY3 Cost
Adjusted for FY3
Projected FY3 Cost
$188,147 (1a)
$ 0 (1b)
4,252(2a)
0 (2b)
32,606 (3a)
0 (3b)
7,162 (4a)
0 (4b)
5.Pensions
0 (5a)
$22,785 (Line 5b,
Worksheet IIA)
Up 5.5%/year
25,360 (5b)
$22,785 x 1.055 x
1.055
6.Other Personnel
Costs
0 (6a)
0 (6b)
7.Total Personnel
$ 225,167 (7a)
$ 25,360 (7b)
8.Grand Total, Personnel Costs
$ 250,527 (8)
(Line 7a + Line 7b)
Costing Municipal Services: Workbook and Case Study
30
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT IB: PROJECTED FY3 EQUIPMENT & SUPPLY COSTS
FY1
Direct Cost
Adjusted for FY3
1.Equipment capital
costs
Indirect Cost
Projected FY3 Cost
Adjusted for FY3
Projected FY3 Cost
Unchanged
$8,000 (1a)
$ 0 (1b)
Up 9% due to
increase in service;
up 4%/year due to
inflation. $1,545 x
1.09 x 1.04 x 1.04
1,821 (2a)
0 (2b)
Up 9% due to
increase in service;
up 4%/year due to
inflation. $2,060 x
1.09 x 1.04 x 1.04
2,429 (3a)
0 (3b)
Up 4%/year
1,190 (4a)
0 (4b)
Up 9% due to
increase in service;
up 4%/year due to
inflation. $1,245 x
1.09 x 1.04 x 1.04
1,468 (5a)
0 (5b)
Unchanged
because costs of
maintenance
contract is
guaranteed
750 (6a)
0 (6b)
$ 15,658 (7a)
$ 0 (7b)
$8,000 (Line 1a,
Worksheet IIB)
2.Equipment &
Maintenance
$1,545 (Line 2a,
Worksheet IIB)
3.Equipment
Supplies
$2,060 (Line 3a,
Worksheet IIB)
4.Equipment
Insurance
$1,100 (Line 4a,
Worksheet IIB)
5.Service-related
Supplies
$1,245 (Line 5a,
Worksheet IIB)
6.Other Equipment
& Supply Costs
$750 (Line 6a,
Worksheet IIB)
$1,100 x 1.04 x
1.04
7.Total Equipment
& Supplies
8.Grand Total, Equipment & Supplies
$ 15,658 (8)
(Line 7a + Line 7b)
Costing Municipal Services: Workbook and Case Study
31
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT IC: PROJECTED FY3 FACILITY COSTS
FY1
Direct Cost
Adjusted for FY3
Indirect Cost
Projected FY3 Cost
1.Capital Plant &
Outlay
Adjusted for FY3
Projected FY3 Cost
$0 (1a)
Unchanged
$ 30,000 (1b)
0 (2a)
Up 4%/year
470 (2b)
$30,000 (Line 1b,
Worksheet IIC)
2.Utilities
$435 (Line 2b,
Worksheet IIC)
$435 x 1.04 x 1.04
3.Building
Insurance
0 (3a)
Up 4%/year
1,526 (3b)
$1,411 x 1.04 x 1.04
$1,411 (Line 3b,
Worksheet IIC)
4.Building
Maintenance
0 (4a)
$421 (Line 4b,
Worksheet IIC)
Since most of this
cost is for
personnel, 5.5%
yearly increase is
estimated
469 (4b)
$421 x 1.055 x
1.055
5.Other Facility
Costs
0 (5a)
0 (5b)
6.Total Facility
Costs
$ 0 (6a)
$ 32,465 (6b)
7.Grand Total, Facility Costs
$ 32,465 (7)
(Line 6a + Line 6b)
Costing Municipal Services: Workbook and Case Study
32
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT ID: PROJECTED FY3 OTHER COSTS
FY1
Direct Cost
Adjusted for FY3
Indirect Cost
Projected FY3 Cost
1.Assessments
Adjusted for FY3
Projected FY3 Cost
$0 (1a)
$ 0 (1b)
1,150 (2a)
0 (2b)
3.Travel
0 (3a)
0 (3b)
4.Indirect Operating
Costs
0 (4a)
2.Education
$1,150 (Line 2a,
Worksheet IID)
$5,282 (Line 4b,
Worksheet IID)
Since most of this
cost is for
personnel, 5.5%
yearly increase is
estimated
5,879 (4b)
$5,282 x 1.055 x
1.055
5.Indirect
Administrative
Costs
0 (5a)
0 (5b)
6.Other Costs
0 (6a)
0 (6b)
$ 1,150 (7a)
$ 5,879 (7b)
7.Total Other Costs
8.Grand Total, Other Costs
$ 7,029 (8)
(Line 7a + Line 7b)
Costing Municipal Services: Workbook and Case Study
33
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT II: PROJECTED FY3 TOTAL COSTS
Direct Costs
1. Total Personnel
Indirect Costs
Sum of Direct &
Indirect Costs
$ 225,167 (1a)
$25,360 (1b)
$ 250,527 (1c)
15,658 (2a)
0 (2b)
15,658 (2c)
0 (3a)
32,465 (3b)
32,465 (3c)
1,150 (4a)
5,879 (4b)
7,029 (4c)
$ 241,975 (5a)
$ 63,704 (5b)
$ 305,679 (5c)
Costs (Line 7a, 7b,
8 Exhibit IA)
2. Total Equipment &
Supply Costs (Lines
7a, 7b, 8, Exhibit
IB)
3. Total Facility Costs
(Lines 6a, 6b, 7,
Exhibit IC)
4. Total Other Costs
(Lines 7a, 7b,8,
Exhibit ID)
5. Total Costs
6. Less Revenues from fees
$ 60,060 (6)
715 runs estimated for FY3 x $120 fee/run = $85,800
$85,800 x 70% (average collection rate) = $60,060
7. Net Cost
$ 245,619 (7)
Full Cost (Line 5c) – Revenue from fees (Line 6)
Costing Municipal Services: Workbook and Case Study
34
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT IIIA: FY3 AVOIDABLE PERSONNEL COSTS4
Projected FY3 Cost
Calculation of Avoidable Cost
1.Salaries & Wages
Termination of 6 EMTs will save
$136,900
Avoidable FY3 Cost
$ 136,900 (1)
$181,147 (Line 1a, Exhibit IA)
2.Additional pay
Termination of 6 EMTs will save $3,196
3,196 (2)
Termination of 6 EMTs will save
$24,470
24,470 (3)
$4,252 (Line 2a, Exhibit IA)
3.Fringe Benefits
$32,606 (Line 3a, Exhibit IA)
4.Supervision
None is avoidable
0 (4)
$7,162 (Line 4a, Exhibit IA)
5.Pensions
Termination of personnel will reduce
pension costs by $19,166
19,166 (5)
Terminated personnel will be eligible for
unemployment compensation;
accountant estimates likely payments to
be $7,800. Avoidable costs are
reduced by this amount.
– 7,800 (6)
$25,360 (Line 5b, Exhibit IA)
6.Other Personnel Costs
7.Total Avoidable Personnel Costs
$ 175,932 (7)
Accepting the contract will result in termination of 6 (or 75 percent) of the 8 EMTs. Because the EMTs are at
different levels of the pay scale, savings resulting form the termination will not be precisely 75 percent of the
total FY3 personnel costs. Avoidable personnel costs in this Exhibit are estimates by the accountant.
4
Costing Municipal Services: Workbook and Case Study
35
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT IIIB: FY3 AVOIDABLE EQUIPMENT & SUPPLY COSTS
Projected FY3 Cost
Calculation of Avoidable Cost
1.Equipment capital costs
Vehicle can be sold for $6,000; this
amount is an average cost.
Avoidable FY3 Cost
$ 6,000 (1)
$8,000 (Line 1a, Exhibit IB)
2.Equipment & Maintenance
100 percent avoidable
1,821 (2)
100 percent avoidable
2,429 (3)
100 percent avoidable
1,190 (4)
100 percent avoidable
1,468 (5)
100 percent avoidable
750 (6)
$1,821 (Line 2a, Exhibit IB)
3.Equipment Supplies
$2,429 (Line 3a, Exhibit IB)
4.Equipment Insurance
$1,190 (Line 4a, Exhibit IB)
5.Service-related Supplies
$1,468 (Line 5a, Exhibit IB)
6.Other Equipment & Supply Costs
$750 (Line 6a, Exhibit IB)
7.Total Avoidable Equipment & Supply Costs
Costing Municipal Services: Workbook and Case Study
$ 13,658 (7)
36
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT IIIC: FY3 AVOIDABLE FACILITY COSTS
Projected FY3 Cost
Calculation of Avoidable Cost
Avoidable FY3 Cost
1.Capital Plant & Outlay
None is avoidable
$ 0 (1)
Building department estimates that only
50 percent of the ambulance’s share of
this cost will be avoided.
235 (2)
$30,000 (Line 1b, Exhibit IC)
2.Utilities
$470 (Line 2b, Exhibit IC)
50% x $470
3.Building Insurance
None is avoidable
0 (3)
$1,526 (Line 3b, Exhibit IC)
4.Building Maintenance
$469 (Line 4b, Exhibit IC)
Building department estimates that only
50 percent of the ambulance’s share of
this cost will be avoided.
235 (4)
50% x $469
5.Other Facility Costs
0 (5)
6.Total Avoidable Facility Costs
Costing Municipal Services: Workbook and Case Study
$ 470 (6)
37
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
EXHIBIT IIID: FY3 AVOIDABLE OTHER COSTS
Projected FY3 Cost
Calculation of Avoidable Cost
1.Assessments
2.Education
Avoidable FY3 Cost
$ 0 (1)
100 percent is avoidable
1,150 (2)
$1,150 (Line 2a, Exhibit ID)
3.Travel
4.Indirect Operating Costs
$5,282 (Line 4b, Exhibit ID)
0 (3)
Because indirect operating costs for
ambulance service are a small
percentage of the costs in the treasurer/
collector’s and accountant’s offices, their
associated costs will not change.
Therefore, none of this cost is avoidable.
0 (4)
5.Indirect Administrative Costs
0 (5)
6.Other Costs
0 (6)
7.Total Avoidable Other Costs
Costing Municipal Services: Workbook and Case Study
$ 1,150 (7)
38
Part Two: Masstown Ambulance Service, A Case Study
Department of Revenue
Division of Local Services
Masstown Ambulance Service
Your job as Finance Director to recommend to the City Council if it should contract out
for ambulance service or keep it as is?
Please write a one page memo making your recommendation – you can include some
basic costs data as well.
Bring your memo to the next in-class meeting.
Purchase answer to see full
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