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UNIT COSTS

As previously indicated, unit costs are a very useful tool for management decisionmakers because they reduce costs to a common denominator, namely the unit. This common denominator enables the manager to better interpret what is happening to his costs than would be possible if total costs were used without the common denominator. Some examples follow.

Unit Costs as a Decisionmaking Tool

Bureau of Engraving and Printing

The Bureau of Engraving and Printing uses unit costs extensively as a management tool. The effectiveness of the Bureau's use of unit costs is shown by a comparison of the unit costs of printing bank notes (dollar bills and other bills of various denominations). In 1952, the cost per 1,000 notes was $9.92. At the close of fiscal year 1971, the cost per 1,000 notes was $7.69, or $2.23 lower, despite the substantial inflation that has occurred in the intervening years.

The system of data reporting on operations generated by the Bureau's cost accounting system brings to the attention of management those conditions which may be hampering a cost center from achieving maximum operating efficiency. Mr. James A. Conlon, Director of the Bureau, attributes much of the Bureau's ability to reduce its costs to management decisions resulting from effective use of unit costs.

Some examples of how unit costs are used follow:

--In one case, the unit cost rates showed the printing
costs for numbering currency notes were about 20 cents
per thousand units while the unit cost of the manual
finishing operations was nearly 9 times as great, or
$1.76 per thousand units. By identifying the manual
operations which constituted most of the cost, the
Bureau was able to concentrate engineering studies
towards automation of those operations. Custom-
designed equipment was developed which the Bureau
predicts will result in reductions in cost of $2 mil-
lion annually.

--In another case, one machine appeared to be operating
economically, but, through use of unit costs, Bureau
managers identified that the cost of required addi-
tional labor at another stage in the process made the

total unit cost uneconomical. A new procedure was installed which eliminated the need for additional labor and resulted in a lower total unit cost.

--Custom-designed automatic equipment was introduced in the Bureau for the manufacture of postage stamps in coil form which combined a number of operations (many of which were hand operations) previously performed separately.

--In a similar vein, the Bureau intends to invite bids
in the coming fiscal year for the construction of
specialized equipment for the mechanization of the
many manual operations currently employed in manu-
facturing postage stamps in booklet form--all at con-
siderable savings in manpower and associated costs,
as identified in cost-benefit analysis predicated on
unit cost data.

--As a result of an in-depth analysis of production costs, a special committee appointed by the Director to conduct studies on surface printing equipment has made several recommendations as to the optimum mix of new presses which should be acquired by the Bureau to produce more economically and effectively the wide variety of miscellaneous products printed by the offset and letterpress process.

Bureau of Accounts

The Treasury Department's Bureau of Accounts has long supported its appropriation request to the OMB and the Congress with unit costs of operations for central disburing activity.

Bureau officials believed that substantial benefits would accrue to the Government if the nearly 500 million pieces of mail each year were made available to the Postal Service in ZIP Code sequence. By use of unit costs, the Bureau was able to compute these benefits. As a result, with the full support of OMB and the Congress, the Bureau now spends over $250,000 a year (about 1.004 cents per unit of output) to presort its mailings, thus enabling the Postal Service to save about $3,250,000 of sorting costs annually-a cost benefit ratio of 13 to 1. The use of unit costs made it possible to identify this interagency savings.

General Accounting Office

The General Accounting Office in its Transportation Division has used the concept of unit costing for a number of

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years to measure the efficiency of its procedures and techniques for auditing transportation vouchers for overcharges. By relating hourly audit costs to overcharges recovered from carriers, the GAO managers have implemented various actions which have made its transportation auditors twice as productive as they were in 1962. For example, net overcharges on audit of freight bills increased from $12 per hour of audit effort in 1962 to $27 per hour in 1971. In the audit of passenger bills the net amount of overcharge revenue increased from $4 an hour in 1962 to $24 an hour in 1971.

One example of past management actions which was predicated on this relation of costs to returns is the development of a computerized system for audit of domestic household goods shipments. It was determined that a significant overcharge potential existed in bills submitted for shipment of household goods but that this potential could not be economically recovered by manual audit. Management, therefore, developed a method of doing this audit through use of a computer, resulting in an economical audit that has produced increased revenues averaging $100,000 annually and is projected to produce a total increase in revenues of about $300,000 annually when fully implemented.

In another example it was found that significant savings could be achieved by a change in procedures initiating correspondence to clarify unsupported and questionable changes before resorting to the expensive process of computing and billing for the overcharges. As a result of this and other policy changes the overcharge cancellation rate decreased from 17 percent to 9 percent on freight items, and from 50 percent to 5 percent on passenger transactions. The resultant savings in manpower is estimated to be about 20,000 man hours per year.

In another example, management knew through relation of its "cost to return ratio" that the rising cost of salaries was significantly increasing the cost of auditing small dollar claims and was therefore adversely impacting on overall productivity. Although not economical, a surveillance type audit of such claims is required. To meet this problem, management introduced statistical sampling in the audit of these small value claims. Statistical sampling makes it possible for management to maintain the cost at minimum levels, consistent with the required degree of audition.

Unit Costs as a Basis for Setting Charges

Many Federal agencies perform special services for particular segments of the population that are beyond those which accrue to the general population. It is the general

policy of the Federal Government to charge fees for such services. It is also the policy of the Federal Government that when such fees are charged, they ordinarily should be commensurate with the cost of performing the service. In some cases, the law providing for the service specifies that the fee to be charged should be just what is required to recover the cost. Unit costs are tailor made for providing such information. However, a number of GAO reports have shown cases where agencies did not have good unit costs and were not recovering the costs of performing the services.

Unit Costs as a Means of

Demonstrating Efficient Performance

Unit costs can be very effective as a means of demonstrating how efficiently management has performed. Effective use was recently made of this attribute of unit costs by the Treasury fiscal services. The fiscal services felt that the overall reduction of one tenth of a grade ordered by the President for all Government agencies for fiscal year 1972, would be unduly harmful to their operation. In a meeting with OMB to gain exemption from this requirement, they showed with unit costs and supplementary data that over the past 20 years unit costs had dropped 28 percent while workload had increased 165 percent. The reason was a 515 percent increase in productivity. The table below shows the pertinent figures.

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As a result of the excellent showing they had made in increasing productivity and decreasing unit cost, the exemption was granted.

Potential for Further Use of Unit Costs is High

In phase one of the study, the joint project team found that about 39 percent of the employees of the participating agencies were covered by unit costs, as follows:

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The joint team in Phase II of its study undertook to assess the potential for extending the use of unit costs. The study was limited to civilian agencies. From the study of 10 civilian agencies with annual operating funds of about $5.5 billion, the team concluded that $4.7 billion (or about 85 percent) of the operating funds could be brought under unit costing.

As part of a further effort to identify the potential use of the unit cost concept, a demonstration project with Commerce Department's National Technical Information Service was undertaken. The objective was to develop and test the methodology for systematically identifying the levels and types of unit cost data required at all managerial levels. For example the areas where unit costs can be used are such as pricing of documents, forecasting inventory policy, storage policy and cost estimation. The managerial levels considered range from the unit supervisor, to the director. constructing a matrix between needs and users, definitive unit cost data were identified. The results to date, which are preliminary, show that an information system of unit costs and related factors can be developed on an interrelated basis considering the impact of decisions made from time to time.

Disincentives to Greater Use of Unit Costs

By

Many reasons are expressed or suggested as to why agencies do not use unit costs more widely in the preparation of their budget and in the management of their activities. In the following paragraphs we have attempted to interpret some

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