Activity Based Costing in a City Government’s Utility Company Budgeting Process

HE objective of this study is to investigate the effectiveness of an Activity Based Costing (ABC) model in predicting aggregate budgeted cost for the utilities department in a local government. In the past few years, there has been a pressure on the city officials to reduce the costs. This is forcing cities to re-examine their current allocation of resources to various activities. We examine the budgeting process for the Utilities Department of City of Paris1. Our study uses ABC to predict the operating costs on a monthly basis based upon the identified cost driver. In the process, we have also been able to identify inefficiencies in the billing process, in particular, and provide an effective measure of reducing non-value-added activities in general. The application of ABC should benefit the cost control process in providing services.