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A Costing Guide

The ABC Team within Management Audit Services May 2003

Document summary:

Management Summary

a) Costing changes to work processes has a major impact on organisations and their internal efficiency. Its importance in the legal field is exemplified in that one of the first actions of the present Government was retrospective costing of a number of major Criminal Justice System (CJS) initiatives, including the influential Woolf report.

b) Change has become the new constant within the CJS and all change, however slight, has cost implications. All managers need to be aware of the various costs of change, particularly when embarking on new projects with other CJS partners, who themselves may also require advice on costing approaches.

c) Although every costing should be done with care and honesty, it must always be remembered that a costing is always just a costing and cannot hope to achieve the accuracy of costing real expenditure after the event. A costing should strive to be as helpful as possible but sometimes, effort can be wasted on costing to achieve what is, at best, often spurious accuracy.

d) It is possible to undertake basic costing without too much trouble. Annex 4 provides a simplified methodology for straightforward costing that can be based on existing ABC data or even rough estimates.

e) The basic calculation for all costing is:

Volume/Frequency x Time x Conversion Factor = Staff Years. Staff Years x Average Salary = Cost

f) For example, if the activities to be costed were "Issue witness form", where staff on average salaries of £12,000 issue 25,000 forms and each form requires 5 minutes of staff effort, the calculation would simply be:

25,000 forms x 5 minutes x 0.00001069 = 1.376 staff years. 1.376 staff years x £12,000 = £16,512 cost

g) The current permanent cost CPS national costing conversion factor is: 0.00001069

h) Differing salaries and hours worked in London give a London-only factor of: 0.00001099

i) All of us are capable of making mistakes, particularly where figures are concerned. Always show your costing to as many interested parties as possible, and get someone else to rigorously check your calculations before publication.

Introduction

1.1 Costing changes to work processes has a major impact on organisational efficiency. One of the first actions of the present Government following the election was to retrospectively cost a number of major CJS initiatives, including the influential Woolf report. Introducing change without costing its implications leads to poor quality performance, causing additional pressure for staff, as well as contributing to stress and low morale.

1.2 Change has become the new constant within the CJS workplace and all change, however slight, has cost implications. All managers need to be aware of the various costs of change, particularly when embarking on new projects with other CJS partners, who themselves may also require clear advice on costing approaches.

2. The Purpose of the Guide

2.1 The aim of this Guide is to provide a basic costing toolkit, with:

  • instruction on the methodology to be used;
  • background information on the costing process;
  • an outline of the Activity Based Costing system used to distribute resource to CPS Branches.

3. What should Costing cover?

3.1 Costing should always cover two specific areas of cost or saving, which are:

  • Staff Costs/Savings.
  • Non-Staff Costs/Savings.

Within CPS the majority of cost is accounted for through staff and the guide concentrates on this aspect.

3.2 Why is Costing important for managers?

Costing is required whenever a policy or operational change is proposed which could alter procedures and consequently staffing requirements. This is particularly important when funds available to managers within the Criminal Justice System are restricted and new partnerships and processes are being constructed.

3.3 To understand fully why costing is needed, it is necessary to know something about the complementing system used in CPS to decide the level of resources needed in Areas.
Full details are shown at Annex 1.

4. What can be costed?

4.1 The simple answer is that everything, including things that have not yet occurred, can be costed. Costing the future is regularly required by government and is called ‘speculative’ costing.

4.2 An important message

Although every costing should be done with care and honesty, you should always remember that a costing is always just a costing and cannot hope to achieve the accuracy of real expenditure costing after the event.

A costing should strive to be as helpful as possible but sometimes, much effort can be wasted on costing to achieve what is, at best, often spurious ‘accuracy’.

5. Preparing A Costing

5.1 Simple Costing

It is possible to undertake a basic costing without any technical expertise. By applying the cost per minute to the time required, an overall cost can be established. Timings can be established either by reference to the ABC team or staff estimates as to the time required to complete a particular task.

5.2 Large scale costing

If the costing need is greater or more complex, more information is needed to calculate costs. This information comprises -

  • Staff Costs by Level

Up-to-date national average staff costs by level are available through your Departmental Ready Reckoner. More immediate local staff costs can be obtained by application to your local Service Centre or Area secretariat who can provide information through The CPS Corporate Information System (CIS). A table of national average costs per minute per level is shown at annex 2.

  • Define the task worksteps

Every costing needs a set of simple worksteps showing all the work needed to take account of the change. You may find drawing a process flowchart helps in defining any actions involved in the costing. Guidance on this aspect can be found in “A Guide to Process Improvement”, available from MAS or the ABC Team.

  • How often do we/ will we do the defined task?

To answer this question, you need the volume/ frequency of actions for each workstep. Volume is simply how many actions you undertake and frequency is how often you undertake that action. As an example, you might expect 5,000 cases to reguire a particular form (volume) and that on average 2 forms per case will be issued (frequency).

  • How long does it/ will it take?

You require the time, in minutes, to complete each workstep. This time can be either measured by observation or estimated by someone who is familiar with the task or who can accurately visualise it. This is known as ‘Analytical Estimation’ which is simply estimations provided by experienced staff. There is nothing wrong whatsoever with estimates informed by real experience.

5.3 How do I get all this to convert to a “staff year” equivalent with all the appropriate allowances?

You need a costing formula which converts your answer in minutes to staff years or staff posts. Expressing your calculation in staff years is more meaningful and can then be readily converted to a cost by applying average annual salary costs.

5.4 The CPS Costing Conversion Factor

The costing conversion factor is a mathematical formula produced and maintained by the ABC team which produces an answer in numbers of staff posts. It includes:

  • a converter factor to translate minutes into staff years;
  • an absence factor for all times when staff are absent from work

The current permanent cost CPS costing conversion factor is: 0.00001069

By way of illustration - 93,462 minutes of work per year in CPS equals 1 staff post after allowance is made for absence. Differing salaries and hours worked in London give a London-only factor of: 0.00001099

When costing overtime working, a separate factor is required because overtime has no absence factor (think about it!). This formula can be obtained from the ABC team, if required.

5.5 Within any costing system provision has to be made for inevitable absences from the workplace due to annual leave or sickness, for example. If our basic timings indicate that a team of 4 staff are required to complete a set amount of work, it will mean that nearer 5 will be actually needed to cover for absences within the team over the working year.

5.6 I’ve now got all the information : how do I use it?

The basic calculation for all costing is:

Volume/Frequency x Time x Costing Conversion factor = Staff Years

Staff years x Average salary = Cost

For example, if the activity to be costed was "Issue witness form", where staff on average salaries of £12,000 issue 25,000 forms, and each form requires 5 minutes of staff effort, the calculation would be:

25,000 forms x 5 minutes x 0.00001069 = 1.376 staff years.

1.376 staff years x £12,000 = £16,512

You must always ensure that all timings are in minutes. Do not use days, half days or hours because, when you use the costing conversion factor, your answer will be incorrect.

This formula is also broadly suitable for use by other CJS agencies, including the Police, Courts and Probation Service. If in any doubt please seek further advice from the ABC team who will be happy to help.

6. Preparing a Costing -Non-Staff Costs

6.1 There are four distinct areas of non-staff costs which are:

  • Postage
  • Stationery
  • Telephones
  • Travel and Subsistence (T&S)

6.2 Whenever a costing is compiled showing a change in staffing levels, any possible change in these non-staff requirements must also be considered. You may also need to take into account other non-staff costs such as IT development or capital costs of equipment purchased before going ahead with a change. However, these costs are outside the remit of this guide.

The following ideas may be useful for estimating the costs for each of the areas of non-staff costs/savings.

6.3 Postage

Most post leaving CPS Branches is sent 2nd class which is currently £0.19 (1st class is £0.27). Do not forget to include the cost of a pre-paid envelope if included. The cost of using the DX Service should not be included.

6.3 Stationery

The cost of forms can be difficult to estimate because it is based on total usage within the Service and high usage bulk ordering can often reduce costs drastically. The ABC team hold some guidance on the cost of paper and envelopes and in general, envelopes cost around £0.02 and forms around £0.01. It must be emphasised, however, that the cost of forms can vary from print run to print run depending on the quantities ordered and the timescales. Do not forget to include the cost of envelopes when issuing forms and letters (including the cost of the reply paid envelope, if enclosed).

6.4 Telephones

Only the cost of external calls leaving the Branch need to be considered here. Information from various surveys suggest that the average cost is not likely to exceed £0.20, if the majority of calls are local ones. You will, however, need to consider a higher cost if the task requires a long distance call to be made, as will often be the case at Headquarters.

6.5 Travel and Subsistence

There are few costings which need to include these particular items. However, they should be considered if necessary and data is easily available through local finance centres. In addition, an element may need to be included if training isbeing organised off-site.

7. The Checklist

7.1 Before presenting your costing, it is useful to ask yourself the following questions:

  • Have all necessary worksteps been included and at the correct grade?
  • Are worksteps and procedures logical, efficient and accord with best practice?
  • Are the volumes/frequencies correct?
  • Has the most up-to-date information been taken into account within the costing?
  • Are all sources of information quoted?
  • Are there other sources of information that might be useful?
  • Will the change have an impact on other areas of work, either within the Branch or outside, besides the one considered in the costing?
  • If estimates have been used, have reasons been offered for the use of the estimates and is the reasoning sound?
  • Has the correct costing formula been used and are the timings correct?
  • Will the change have a permanent impact on the level of resources or is it work which will need extra “one off” funding?
  • If required, are all appropriate non-staff costs included and correctly calculated?

7.2 Get it checked!

It is a sad fact of life that no one is perfect and all of us are capable of making mistakes, particularly where figures are concerned. Always show your costing to as many interested parties as possible, and get someone else to rigorously check your calculations before publication.

8. Formal Presentation of a Costing

8.1 Costing, at whatever level, needs to be clear, concise and easily identifiable. All costing should include the following:

  • An easily understood title, including the name of the activity concerned
  • A short and simple description of the change, including reasons for the change and whether it is a revised costing.
  • As well as outlining the change, there needs to be additional information about the date the change is to be implemented from or whether the costing is speculative only.
  • Details of the information used and the sources of that information, including volume figures and how they were calculated. If estimates have been used, there should be a clear explanation in support of the estimate.
  • The staff and non-staff costs/savings in the respective financial year(s).
  • A worksheet showing the worksteps, volumes/frequencies, timings and the calculations to obtain the staff year totals and the non-staff costs.

8.2 Costing calculations can be made using a calculator but the easiest and most efficient way is by the use of a computer spreadsheet. A floppy disc containing a basic costing spreadsheet format for both staff and non-staff costs is available on request from the ABC team.

9. More complex calculations -the Effect of Changes in Workload Volumes

9.1 When a change is to be introduced, it is necessary to consider the likely impact on caseload as some changes may affect the numbers of cases dealt with.. For instance, if a change is made to the prosecution procedure, more (or less) cases may result. Success rates in this context (such as with Narey) are very important. Not only should the costing include the increase/decrease in the total cases, it will also need to take account of changes to other activities that support the core process.

9.2 Costing A Change In Workload Volumes

Method 1

There are other factors to take into account when calculating an increase/decrease in workloads, such as considering when any likely change will take place. If, for example, you expect an increase of 2,400 cases to gradually build up throughout the year, the way to calculate the resource requirements would be as follows:

Date Caseload time saved/gained Formula staff Years
April 200 x 250 mins x 0.00001069 x 1/12 = 0.0670
May 400 x 250 mins x 0.00001069 x 1/12 = 0.1340
June 600 x 250 mins x 0.00001069 x 1/12 = 0.2010
July 800 x 250 mins x 0.00001069 x 1/12 = 0.2680
Aug 1000 x 250 mins x 0.00001069 x 1/12 = 0.3352
Sept 1200 x 250 mins x 0.00001069 x 1/12 = 0.4023
Oct 1400 x 250 mins x 0.00001069 x 1/12 = 0.4693
Nov 1600 x 250 mins x 0.00001069 x 1/12 = 0.5360
Dec 1800 x 250 mins x 0.00001069 x 1/12 = 0.6030
jan 2000 x 250 mins x 0.00001069 x 1/12 = 0.6700
Feb 2200 x 250 mins x 0.00001069 x 1/12 = 0.7370
March 2400 x 250 mins x 0.00001069 x 1/12 = 0.8040

Total Staff Years = 5.22

As you can see, the resource requirements have been calculated month by month until they build up to the total increase in load of 2,400. This is known as a ‘weighted average’ costing.

Method 2

Another method of producing the resource requirements would be to add up Column 2 (cases) and divide by 12 (months) as follows:

(15600 cases / 12) x 250 minutes x 0.00001069 = 5.22 staff years

Compare the answers at 1 and 2 with the following calculation:

2400 x 250 minutes x 0.00001069 = 6.41 staff years.

In this example, you are assuming that the full increase in load will happen immediately and the resource requirements are those needed to deal with the full increase for the complete year which is the reason that the resource requirements are so much higher than those at 1 and 2.

9.3 It is extremely important to reflect accurately when and at what rate the increase in load will occur. Otherwise it is possible to put in too many resources before they are needed.

10. Changes Which Require Additional Resources To Allow For Staff Training

10.1 Most procedural changes will not require additional resources for staff training because allowances are already made to take account of the time staff take to read and assimilate new instructions, circulars and guidance. However, occasionally a change is costed which has additional significant training requirements.

10.2 This involves quantifying the training need, who will deliver the training and how long it will take. Worksteps relating to the training should then be added to those relating to the processing of the work and an overall total staff year requirements figure produced.

10.3 If you have to cost a change which may have training implications, you need to seek advice from Central Training about the best way that the training could be delivered and the likely duration of any training.

10.4 For instance, if local staff are to deliver some training, you would need to consider whether they would need time to produce a training package, in addition to the time they would spend delivering the training. You would also need to quantify how many staff would need to receive training and whether any additional costs would be incurred through extra agents cover, for example. This information needs to be converted into the "Volume/Frequency x Time x Costing Formula" format and added to the rest of the costing dealing with processing the work.

10.5 For example, if one Training Officer per Area was to deliver 2 days training to 2 staff per Area and needed 5 days to research and produce the training package, the worksteps would be:

Workstep Formula Vol / Freq Years Time (in mins) Costings Staff

Training Officers
0.00001069 = 1.5
in 42 Areas research & prepare material

 42 x (5 days x 144 minutes per day) 2220 minutes x

Training Officers
0.00001069 = 1.2
deliver training to 2 staff members per Area

126

(3x42)

 x (2 days x 444 minutes per day) 888 minutes x

Total staff years 2.7

11. In Conclusion

11.1 Costing processes is an essential part of sensible management. If you do not cost a process, you will have difficulty managing it, and unless you manage a process, you cannot improve it. The manufacturer who sells his product at less than the cost of production goes out-of-business, as will any manager who ignores the cost of their core processes.

11.2 The information within this report should allow you to confidently approach the costing of any task or process. In broad terms, we also believe that it can be used by any other member of the Criminal Justice fraternity for general costing, using the information we have defined for The Crown Prosecution Service as an indicator.

11.3 The Activity Base Costing team are always willing to help with any further advice or assistance that is required and can be contacted on the following numbers:

Andy Beard
C/o Midlands Service Centre
Room 13/10
Colmore Gate
Birmingham
DX: 719540 Birmingham 45
Telephone 0121-616-3318
Mobile 07901-856-258
e-mail andy.beard@cps.gsi.gov.uk 		Paul Martin
CPS HQ
Room 210
United House
York
DX: 65204 York 6
Telephone 01904-545599
Mobile 07901-856-259
e-mail paul.martin@cps.gsi.gov.uk

This report links to the ABC/ Police Guide to Process Improvement which is available from the ABC team.

Annexes

Activity Based Costing – an outline

What is Activity Based Costing?

Activity Based Costing (ABC) is an internationally recognised system which in CPS, produces accurate staff costs for each activity which takes place in the prosecution process, from advice, review and case preparation, through to presentation and disposal. It is based on a breaking down each activity into its constituent parts to measure the staff effort required using a variety of conventional measurement techniques. This enables staff costs at appropriate levels to be attributed to all activities within the prosecution process.

What does ABC deliver?

ABC provides CPS with;

  • a standard against which Areas/Branches can compare their performance;
  • the identification of resource intensive activities, which can be targeted for improvement;
  • information which can be translated into meaningful performance indicators - for example, unit costs;
  • information to support local managers in achieving more effective deployment and management of their resources;
  • information on staff costs and timeliness to inform JPM initiatives;
  • a robust tool for assessing the potential impact on The CPS of changes in legislation, or other charges to the prosecution process;
  • an assessment of CPS staffing requirements in direct relation to its workload and a tool to distribute resources between Areas equitably.

Activity Based Costing provides an objective basis for determining the appropriate levels of staff to deliver core business, ensuring that the Service has the right number of prosecutors, caseworkers and other levels.

What does ABC provide at the local level?

Benchmarking Branch activities through ABC identifies good practice and more efficient working methods which can generated efficiency improvements. It also provides local managers with a greater understanding of the costs and efficiency of their business processes/ practices.

Continued use of ABC at the local level provides managers with the means to deploy their staff more effectively to meet workload fluctuations as well as information about costs and timeliness associated with Joint Performance Management and other CJS initiatives.

As part of this development, there will be a regular programme of benchmarking to continue to facilitate the development of good and efficient practice disseminated to all Areas.

ABC is being developed to make it even more responsive and sensitive to local management needs. The move to 42 Areas gave greater prominence to the need to sensitise resource distribution even further and the long-term aim for ABC is local data collection for local ABC systems. Analysis has already been completed in CPS London who will be the first Area to be provided with an ABC system based on their local average performance. The development of ABC to make it more responsive at a local level will also help poorer performers to identify areas and priorities for improvement. Discussions are now taking place for ABC to support Unit Costs in the context of Resource Accounting.

Unit Costs in CPS

ABC runs alongside unit costs to illuminate their meaning. Unit costs are a measure for calculating the cost of a prosecution within The CPS. CPS has now developed unit cost measures bringing together information provided by a number of separate systems including, Activity Based Costing, Personnel, Estates and Finance.

As part of our overall performance management system The CPS has two principal unit cost measures.

The first simply divides the expenditure by the number of cases handled. Although this approach is simplistic and is not sensitive to variations in the mix of caseload, its value lies in providing a national picture as well as a high level comparison of the variation in cost from Branch to Branch, and from Area to Area. The unit cost can be broken down into its component parts (eg payroll costs, accommodation, GAE and prosecution costs), making comparison more meaningful - and such comparison can even be taken right down to account level to show, for example, whether the photocopying cost per case varies from one Branch to another.

The second type of unit cost uses activity based costing to calculate the staff costs required to deliver the key stages of the prosecution process. It enables a comparison to be made of the relative efficiency of one Branch to another by contrasting the actual costs with the national standard cost. The system also identifies inefficiencies within the process, and measures efficiency improvements at both Branch and national level. With a move to Resource Accounting, ABC can be used to support the purchaser-provider relationship.

Resource Accounting

The Government proposes changes in the way public expenditure is planned and controlled. To summarise:

  • Each Government department will have an accruals-based resource budget and associated departmental financing requirements;
  • Overall public spending will be controlled through a resource control total, with an associated total financing requirement;
  • Departments will produce more systematic analyses of their aims, objectives and outputs;
  • There will be better treatment of capital, with charges for depreciation and cost of capital to encourage more efficient use;
  • In-year controls will be introduced to ensure plans are reflected in expenditure.

Resource accounting depends on accurate Unit Costing information, which CPS currently holds within the CIS and various other systems. Unit Costing charts what is spent by an Organisation; it is less useful when that expenditure is made over a number of elements, each with a differing and indeterminate cost. ABC can detail the range of staff costs arising across the prosecution process in Mags and Crown. By using a combination of Unit Cost and ABC material, it is possible to determine what the Branch/ Area/ Organisation is spending and how that spend is divided.

ABC also captures precise cost relationships between differing prosecution activities which can be applied to Unit Costs to provide an accurate breakdown of costs within the overall CPS spend. This can be achieved by expressing PI cost differentials as factors of each other (ie one summary trial costs the same as 2.42 Guilty pleas) and these factors can then be applied to Unit Costs to show the differing costs of each PI group within the actual spend. The ABC team are also in a position to cost CPS core processes based solely on efficiency to run alongside a “does take” model.

Annex 2 - Estimated National Staff Costs 2003/4

Estimated National Staff Costs 2003/4
Payband Average Payroll Cost Cost per Minute
Lawyers Payband E £81,022 £0.86
Lawyers Payband D £70,164 £0.75
Lawyers Payband C2 £58,499 £0.62
Lawyers Payband C1 £37,151 £0.40
Lawyers Legal trainee (B) £28,752 £0.31
Administrative Payband E £69,786 £0.74
Administrative Payband D £57,795 £0.62
Administrative Payband B3 £46,125 £0.49
Administrative Payband B2 £36,704 £0.39
Administrative Payband B1 £29,726 £0.32
Administrative Payband A2 £22,609 £0.24
Administrative Payband A1 £19,556 £0.21

Average payroll cost figures above include:

  • Average salary
  • London wighting and London pay additions
  • Recruitment and Retention allowances
  • Employers ERNIC
  • Superannuation contributions
  • Any skills allowances

Up-to-date and Branch/Area specific payroll costs can be found on the CorporateInformation System (CIS).