Academic journal article The Government Accountants Journal

The Total Unit Cost Approach to Government Financial Management

Academic journal article The Government Accountants Journal

The Total Unit Cost Approach to Government Financial Management

Article excerpt

Government agencies continue to face the need to improve financial and operating performance. For example, federal government agencies have been directed to improve the quality, timeliness and efficiency of services. 1! In many cases, improvements in both government financial and operating performance are required to deal with increasing demands for services with relatively fewer resources.

This paper reports an in-depth study of a government logistics organization and its internal financial management process. The paper is drawn from a larger research effort that was jointly sponsored by the Association of Government Accountant and the National Association of Accountants to investigate the potential for transferring management accounting technology from the private sector to public sector operations. This research focused on logistics operations in private sector firms and in government. It analyzed private sector financial performance measures that could be applied to public sector operations and examined the use of these measures in a government organization.

The government organization examined had made significant changes in its budget and accounting systems intended to aid improvements in the evaluation of its operational efficiency and effectiveness. It developed a total unit cost-output model to transform its resource allocation process from a traditional input-oriented line item budget to an output-oriented operating budget. The organization also linked output measures to performance standards through an incentive-based mechanism to motivate efforts to reduce costs without degrading service delivery.

The objective of this analysis of the organization's total unit cost model is to identify its characteristics and the techniques the organization implemented based on the model as a basis to assess their feasibility and utility for other government operations. Discussed below are the organization's motivation for making significant changes in its financial management process and how these changes were implemented within the constraints of an annual appropriations process.

The study results are presented in four sections. The first section briefly describes the government operation and its rationale for changing its financial management approach. The second section discusses the development of the total unit cost model and its use in resource allocation and financial performance evaluation. The third section presents the results and a summary of the actions the organization took to achieve them. The final section compares the results of this analysis to findings of other studies concerning service efforts and accomplishments in government and discusses tentative conclusions and possible extensions of the approach.


In 1987, the Defense Logistics Agency (DLA), headquartered in Washington, D.C., had established a goal to reduce its operating costs by 30% over three years to increase its efficiency.

DLA is the federal agency responsible for providing materials and supplies to all branches of the military and other agencies of the federal government from six depots located throughout the United States. This analysis focused on the depot located in Mechanicsburg, Pennsylvania, which handles a broad range of commodies including medical material, clothing and textiles, foodstuffs, and industrial, construction, and electronics items. Its major areas of responsibility include the northeastern United States and the Atlantic overseas area. 2!


The Mechanicsburg depot provides logistic services to meet customer demand for DLA-owned inventory. However, it does not purchase or own the material. DLA inventory managers position material at the depot for distribution to fill customer orders. The depot has an annual operating budget in excess of $50 million and employs approximately 1,400 personnel to process over 525,000 tons of throughput in shipping in excess of four million line items (storekeeping units) annually. …

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