Unit costs in central government annual reports: a critical appraisal of the practices developed

Drawing upon an examination of the annual reports of three Danish government agencies, we offer a critical examination of the calculation practices that have developed within central government. The reports constitute a response to the demand from the Ministry of Finance and National Audit Office of Denmark that government agencies calculate unit costs and disclose these figures to the public. In particular we question whether, in its enthusiasm for bringing unit costs into the public domain, central government risks developing calculation practices that might not be helpful in informing decisions and debate on public spending. Publishing unit costs under the pretence that they can be used for both decision-making and performance measurement is a questionable practice. Within the literature on public sector accounting it has widely been accepted that all the deficiencies of cost accounting that occur in the private sector, such as arbitrary cost allocations, are also to be expected in the figures emanating from the public sector. This paper applies a rationalistic perspective in order to identify the additional problems that appear in the public sector. The findings illustrate that the calculations are not linked to decision alternatives, thus rendering them inappropriate for decision-making. For purposes of performance measurement, the uniformity of services required does not exist. We found that some deficiencies are intrinsic to the very idea of unit costing in the public sector while other deficiencies are producer related. In considering all the deficiencies demonstrated, we argue that the attempt to integrate a financial accounting medium with management accounting practices has failed. Those reading the disclosed figures may be tempted to draw conclusions that are not fully informed. However, we must admit that we cannot preclude that the cost information may be used internally for attention-directing purposes. A large number of the previous annual reports totally fail to consider quality. As an MP, how do you expect me to utilize the information that agency X has sent 12,500 answers to enquiries. Hurrah, have they increased their productivity - or what? Imagine that the 12,500 letters simply said, 'Thanks for your enquiry. Your letter will be considered in our handling of the case.' If the enquiries of the past year really did demand intensive attention, then the productivity has actually decreased. Statements expressed in quantitative terms do not always provide information adequate for political assessments or in order to prioritize. (Chairman of the Public Accounts Committee, Peter Duetoft, MP. See Duetoft, 1998; own translation - ed.)