States Department of the Interior
OFFICE OF THE SECRETARY
Washington, D.C. 20240
APR 1 0
Bureau and Office Heads
From: Nina Rose
Deputy Assistant Secretary - Budget and Finance
Subject: Implementing Activity Based
On January 16, 2002, Deputy Secretary
Steven J. Griles issued a memorandum outlining the direction for department-wide
Activity Based Costing (ABC) implementation. Since then the Department and the
Bureaus have initiated ABC/M pilots and have begun to see its potential for
identifying where resources can be saved and where work processes can be
These efforts resulted in the piloting
and testing of several models for delivering ABC information. The ABC Steering
Committee and I have also spent a good deal of time looking at issues related to
individual bureaus. Now, to be successful, we must move forward and consolidate
our pilot efforts into a single Departmental approach. This approach adheres to
the ABC principles outlined in Deputy Secretary Griles' memorandum of January
16, 2002, as explained below:
1. Ensure ABC cost information comes
from the bureau's accounting records so that there is no debate about the source
of underlying financial
In this Department, ABC cost
information must be directly traced from the activity to the transaction
generating the cost. We can establish this link from the work activity to the
transaction for all Departmental and bureau activities, with the exception of
indirect activities (overhead). We will allocate indirect activity costs only
when we cannot link indirect activities directly with the program/project that
the indirect activity supports.
Throughout the Department, costs will
be directly traced by coding an ABC activity code on every transaction, both
labor and purchases, as the transaction is entered into each bureau's official
accounting system. Indirect costs, both program and administrative, will be
allocated to work activities in those instances where the indirect cost cannot
be directly traced. This allocation will be uniform across all bureaus, and the
Department will specify the indirect cost allocation methodology. Except for
indirect costs, no costs will be allocated or assigned to either activities or
As we have seen from the ABC/M systems
implemented throughout the Department, there are vast conceptual differences in
financial accounting and in managerial cost accounting methodologies like ABC
and they serve different purposes and different customers. The Department plans
to take advantage of ABC to accomplish a multiplicity of goals - improve
accountability, redesign or improve work processes, define the business
architecture, and integrate budget and performance - to name a few. To be
successful in budget and performance integration, for example, our costs need to
reflect a considerable degree of precision to provide program leaders the
information needed to assure fair and equitable program budget decisions.
2. Ensure the classification of
costs reflect the actual use of resources
and not just the tracking of available budgetary resources.
It is paramount that we work with
employees to ensure that the classification of costs reflects the actual use of
resources. In other words, employees must record work and outputs as actually
performed, not as the work was planned or budgeted. This will result in
additional work for our budget organizations initially, but will ultimately help
us work with the Office of Management and Budget and the Congress to identify
more precisely the resources needed for our work.
To accomplish this, beginning October
1, 2003, employees will no longer simply record the number of hours they
spent on the job. Instead, every employee will record on their time and
attendance form the time spent performing the activities defined across the
Department as the actually do the work. This will ensure that we maintain
an accurate record of work actually done. This methodology will eliminate the
need and expense of using survey techniques, as is used in some ABC
3. Ensure the business processes
subject to ABC are the important ones to measure from a bureau's perspective;
ensure that the bureaus do not attempt to subject so many business processes to
ABC that the process becomes unwieldy.
We must carefully consider the work for
which an understanding of cost is most important. Clearly there is a delicate
balance between too much and too little cost information. The Department, in
concert with the bureaus, is in the final stages of completing its work on
identifying and defining the cross cutting ABC activity definitions, outputs,
and output measures that all bureaus and offices will begin coding their time
and purchases to beginning October 1, 2003. The ABC activity definition
set will be forwarded to you for review over the next few weeks. We want to
ensure that the ABC activity definition set truly represents the work the
Department and bureaus do, and are the activities that are important to measure
from both the bureau's and Department's perspective.
As we have experimented in the pilots,
some bureaus have gone through the activity definition process individually and
have developed a set of activities that they have used. Over the next month we
will work with your staff to bring the activities defined by your bureau into
the suite of activity definitions to be used across the Department. This effort
will eliminate the need to map costs to the ABC activity definition set.
In addition, we want to be in a position to identify the products or outputs of
the work we do. We will work with your staffs to review your activities and
describe the single output that results from the activity.
The specific set of activity codes to
which we charge must be flexible to accommodate changing management needs.
Therefore, we will have a process each year to refine our activity codes based
on our experience in use of these codes. We know that management will want to
make adjustments to activities for which costs are collected to best reflect
program management needs.
The ABC and performance modules that
the Department is now working to put in place are the first parts of Interior's
Enterprise Management Information System. These modules will capture cost,
workload, and performance information using the ABC activity definition set we
are now refining with your staffs. The cost information will come directly from
FFS and ABACIS journals and form the basis of the Cost Management module; the
workload and performance data will come from the Performance Module.
the Department's strategic plan outcomes to performance measures and the budget
using ABC as a tool.
During the ABC Activity Definition
Workshops, the intermediate outcome strategy supported by each ABC work activity
was identified, providing the link between work activity, intermediate strategy,
and end outcome goal of the DOI GPRA Strategic Plan. We still have some remedial
work to do where the teams did not settle on a one-to-one relationship between
activity/output and intermediate strategy/end outcome.
This relationship between the activity
and the output associated with an intermediate strategy/end outcome explains why
we are doing work. As we have worked with your staffs, it is clear that other
intermediate strategies/end outcomes may derive ancillary benefits from the
activities performed, but we want to capture the primary relationship between
intermediate strategy/end outcome and activity/output.
I hope that this memorandum clarifies
the procedures we will follow to implement ABC fully across the Department. I
appreciate the work you and your staffs have done and am excited about all the
work that has been accomplished over the last several months.
In the months ahead we will (1) refine
the ABC activity definition set using the experience of the pilots; (2) link the
finance systems to the ABC activity definition set; and (3) develop the cost and
performance modules of the Enterprise Management Information System to collect
and report cost and performance information. My staff and I look forward to
continue working with you on refining your ABC models to prepare for
department-wide ABC implementation in FY2004.
cc: Bureau CFOs
Performance Management Council
Bureau Budget Officers
ABC Steering Committee
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