Activity-based costing: public bodies are finding more and more applications for ABC data. Lana Liu explains a CIMA-sponsored study of its use in the Crown Prosecution Service

Financial Management (UK), March, 2005 by Lana Liu

The Crown Prosecution Service (CPS) is a government agency that provides legal justice services relating to criminal offences committed in England and Wales. On its inception in 1986 it employed a large number of permanent stall including lawyers. But the number of criminal cases declined significantly over the years and the CPS found it hard to justify steady increases in its running costs, more than 85 per cent of which were taken up by salaries.

In 1999 a reorganisation increased the number of CPS area offices from 14 to 42, largely aligning them with regional police jurisdictions. The creation of a larger number of smaller units gave managers less freedom to manoeuvre funds and made them more directly accountable for spending.

Under the government's "best value" funding policy, the agency also faced continuous funding reductions, which meant that its budgeting process involved identifying areas where costs could be cut. Against this background of organisational upheaval and financial constraint, the CPS replaced its traditional budgeting system with an activity-based resource planning (ABRP) system. At its core was the existing activity-based costing (ABC) system (see exhibit 1). This modelled the following main processes of the agency:

* P1: advising the police on possible prosecutions and other legal issues arising during investigations.

* P2: reviewing prosecutions.

* P3: preparing cases for court.

* P4: prosecuting cases at magistrates' courts.

* P5: prosecuting cases at crown courts and higher courts.

* P6: instructing counsel to prosecute cases in crown courts and higher courts.

* P7: working with other agencies to make the criminal justice system more efficient and effective.

The ABC system also measured the following three timing elements:

* Times of activities relating to the CPS's main processes.

* Relaxation allowance times, on the basis of a five-minute break in each working hour.

* Travelling times. These represented between two per cent and ten per cent of an area's resource utilisation. Significant differences exist in this category. For instance, in areas covering cities it might take a lawyer only ten minutes to walk from the office to attend a court session. But in other areas it could take three hours For a lawyer to drive to court. Timing for travelling was determined based on weighted-average values of previous years' actual figures.

A number of area offices were chosen to measure standard activity timings and an external consultant was appointed in 2002 to revalidate these measures. He collaborated with a two-person team that had been set up to maintain the ABC system when it was introduced back in 1995.

Exhibit 1 illustrates the link between processes and resource costs, within which staffing costs are modelled in the ABC system. Area offices are required to record their caseloads (eg, the number of times they advise the police) every month. These figures are then processed in the corporate information system. An area's ABC performance is calculated by multiplying the timings by the monthly caseload.

The core of the ABRP system is the ABC ratio (see exhibit 2), a relative measure that represents how all the areas are using their resources. The annual budget provision is first divided between the CPS's two headquarters and its area offices. Then the ABRP system is used to allocate budgets across the 42 areas.

Exhibit 3 highlights a unique situation facing the CPS. The government introduced a significant cost-reduction plan for the funding period from April 1998 to March 2001. Given that the salaries of permanent staff accounted for such a large proportion of the CPS's running costs, the significant variation under the ABRP approach (see column B of exhibit 3) would result in serious crisis for some area offices eg. area 41. which had a net budget reduction of 878.200 [pounds sterling]. Despite this, the ABRP system highlighted a causal link between ABC performance and budgets. So it seemed to be a plausible tool for internal budget allocation and reinforced the need for performance improvement.

ABRP has proved to be a fairer approach to internal budget allocation. Previously, the annual budgeting process had always been time-consuming and inefficient. With no objective criteria for allocating funds across areas, it had been the typical case of who shouted the loudest got the most. As the manager responsible for budget allocation said: "I used to make a number of assumptions in order to allocate the budget. During that period I would receive a lot of phone calls from people asking me to consider their difficult situations. After the budgets were allocated I received a lot of letters from people complaining about how unfair their budgets were."

A better method was urgently needed and the ABRP system, which helped to allocate limited budgets between areas based on their relative past performance, was seen by senior managers as "the better tool to allocate running-cost budgets cost-effectively". Area managers saw it as "a fairer tool to inform the budget allocation across the areas with less shouting".