SBO, Paris 27-28 October 2008
Aligning Accounting
Systems and
Performance/Cost
Information – the Accrual
Reform and Taximeter in
Denmark
Special Advisor, Ministry of Finance
David Fjord Nielsen
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
30.06.2008 • 2
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
30.06.2008 • 3
Level of Appropriation: Expenditures and Cost
Expenditures
Cost
200
150
100
50
Investment
IT-system
200
Investment
IT-system
Running
cost
150
100
50
09
20
08
20
20
6 07 08 09
0
20 20 20 20
20
06
0
07
0
use of
adjusted
2007
appropria.
Running
cost
30.06.2008 • 4
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
• State’s 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
30.06.2008 • 5
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
30.06.2008 • 6
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
30.06.2008 • 7
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
30.06.2008 • 8
Rates for diff. Types of Educations in 2009 Budget
Education
Educational Completerate
ment rate
Supportservice 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
30.06.2008 • 9
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
30.06.2008 • 10
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?
30.06.2008 • 11
Marginal Cost at Production Target of 200
Operations
100
80
60
40
20
0
0
100
200
300
30.06.2008 • 12