Aligning Accounting Systems and Performance/Cost Information

1
Aligning Accounting Systems and Performance/Cost
Information the Accrual Reform and Taximeter in
Denmark
SBO, Paris 27-28 October 2008

• Special Advisor, Ministry of Finance
• David Fjord Nielsen

2
Agenda

1. The Accrual Reform, the Chart of Account and Cost
   Information
2. Danish Experiences and a View on detailed Cost
   Information
3. Activity-based Budgeting in the Sectors of Health
   and Education
4. Benefits and challenges in the Taximeter Model

3
Accrual Accounting/Budgeting and Cost Information

• Background
• Danish state agencies and departments
  operational expenditures and associated capital
  spending transferred to accrual accounting 2005
  and budgeting 2007
• Covering around 10 pct. of the state budget
• A new cash management scheme and a new chart of
  account in 2007
• Purpose
• Increase managerial freedom and incentives to
  plan investments
• Improve cost information hidden cost revealed
  in the agencies

4
Level of Appropriation Expenditures and
Cost Expenditures Cost
5
The State Chart of Account

• Chart of Account is aligned to handle accruals
  but not to provide standardised cost or
  performance info. to FM/Parliament
• States chart of account Mandatory general
  categories (wages, depreciations) and
  specifications (standard wage, overtime wage)
• Agencies have internal accounting specifications
  (types of purchases) and dimensions (project,
  office, time) for the agencies internal economic
  management
• Standardisation and comparability across agencies
  vs. local needs

6
Downsides to detailed Cost Information

• FM focus on the big numbers. Decentralised
  responsibility for cost control and performance
  management to line ministries
• Unit cost info and detailed budgeting to specific
  services/tasks requires detailed cost allocation
  no matter if the accounting system is in
  accruals or expenditures
• Need to have a purpose comparable units, an idea
  of the right cost, a better budget method
  (activity volatility) or possibly outsourcing
• Most agency programmes, projects or services
  cannot be managed by unit cost

7
Beneficial use of Cost Information in specific
Areas

• Procurement extra mandatory specifications to
  the chart of account
• Establishment of Shared Service Centre need for
  cost information (what is the cost of a support
  function accounting, ICT)
• Efficiency Targets in Performance Contracts
• Activity based budgeting
• - new pilots budgeting to unit cost of
  production
• - the taximeter model in education and health
  care

8
Taximeter in Education and Health Care

• Rates for each type of education are set in the
  annual Budget
• Rates for operations according to DRG (Diagnose
  Related Group system)
• Both systems a block appropriation and activity
  based appropriation
• Rates are being paid to institutions according to
  the number of produced operations / number of
  full-time students following and completing their
  studies

9
Rates for diff. Types of Educations in 2009 Budget
Education Educational rate Complete-ment rate Support-service rate Capital rate
Security Guard 9.000 Euro 1.000 Euro 2.000 Euro 2.000 Euro
Farming 10.000 Euro 1.000 Euro 2.500 Euro 2.000 Euro
Fitness instructor 9.000 Euro 1.000 Euro 2.000 Euro 2.000 Euro
Baker 10.500 Euro 1.000 Euro 2.000 Euro 3.000 Euro
10
Activity-based Budgeting Efficient Allocation of
Funds to Hospitals and Educational Institutions

• Quasi-market Funds are automatically reallocated
  between different hospital/institutions and
  educations as a result of actual activity/demand.
  
• Transparency and equality Allocation of funds
  is based on objective criteria (number of
  students or operations) not possible for strong
  institutions/hospitals to obtain bigger budgets
  through negotiations
• Effectiveness Gives an incentive to service
  improvements (to attract students, patients) and
  output delivery (produce operations, masters) to
  gain funds

11
Downsides of Activity-based Budgeting

• Difficult to set rates according to real costs
  due to information asymmetry
• Detailed cost studies to define rates DRG vs.
  political
• Institutions and hospitals tend only to draw the
  governments attention to increasing costs (and
  not decreasing costs)
• Education Rates are based on average costs and
  not the marginal costs of an extra student
• Health care Marginal costs above production
  target, but when?
• Lower quality as a result of the economic
  incentives?

12
Marginal Cost at Production Target of 200
Operations