The United States Government and Cost Control

With the debt ceiling date approaching in a dangerously short amount of time (we’re talking hours here), the Senate, House of Representatives, and the President must come to an agreement so the United States does not default on its loans.  Currently, the plans under consideration for slashing government spending are a step in the right direction, but the billions of dollars of promised  cuts are vague and lack specificity.

I recently took a managerial accounting class at the University of Kansas, and I believe the government should utilize some of the cost-cutting principles I learned in this course.  Because private firms face competition, these companies must constantly improve their production and engineering processes to keep earning money.  The government has no competition, so it is insulated from such forces.

First, costs must be broken down into cost pools, which are “buckets” in which costs are accumulated as they relate to a single activity.  Then, cost drivers are exactly what propels costs accumulated in the cost pools.  Most government agencies do not utilize managerial accounting to track the costs of their expenditures--costs are not subdivided into cost pools.  Furthermore, most government agencies don’t have the ability to track these kinds of costs--cost drivers are not identified.  The costs are scattered across many budget line items and multiple agencies, making it an absolute nightmare to put the puzzle pieces together.  As a result, nobody knows how much it costs the government to perform the basic functions.  

Firms rely on cost information to make decisions on how and when to reallocate resources.  Corporations have the ability to readjust spending monthly where as changing the United States government budget takes years to push through the molasses of special interest groups and bureaucracies.  It is very difficult to dismantle an existing government program even if it is inefficient.  It is also hard to measure performance.

I recommend that the government consider adopting the principles of cost management.  This demanding process is not easy, but it will lead to effective cost-cutting.  Managers of government agencies need to be given greater pliability to reallocate resources more easily.