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Design and Implementation of Cost Recovery
 

Image: Design and Implementation of Cost Recovery DESIGN AND IMPLEMENTATION OF COST RECOVERY


Who should pay cost recovery charges?

End users of costed ABS products and services are easily identifiable. ABS prices are set to recover the costs of a particular product or service across the end users of that product or service. The end users may be represented by an intermediary, for example, a university may purchase an ABS product which it then on provides to staff and students. Prices are set to avoid cross subsidisation of one client group by another.


Should cost recovery charges be imposed using fees or levies?

While costs can be recovered via fees or levies, levies need to be established using a tax Act, and are not applicable to the ABS. Fees are the more usual method of cost recovery for information agencies. This is the approach adopted by the ABS.


What are the legal requirements for the imposition of charges and which issues should any legislation address?

Section 12, Subsection 3 of the Census and Statistics Act, 1905 provides the authority for cost recovery charges for the ABS. It states "The Statistician may make charges for results and abstracts published and disseminated under this section."


Which costs should the charges include?

These costs are outlined in Marginally costed products and services and Incrementally costed products and services.


Marginally costed products and services

ABS charges for marginally costed products, i.e. the costs incurred in the further dissemination of the products and services in the BIS only include direct costs such as labour and materials. Note that these costs include labour on-costs. Capital and overhead costs are not included. However, the direct costs of systems, built to support only marginally costed products and services, are included as direct costs.


Incrementally costed products and services

Incremental costs include the same costs as those included in marginally costed products and services plus capital and overhead costs that arise as a result of providing the incremental product, i.e. these costs would not have been incurred if the incremental product were not provided.


Table 1 - Costs included in marginally or incrementally costs products and services.


Cost items
Marginal Costs
Incremental
Costs

Direct cost of salaries creating and delivering the product or service.

Costs associated with the payment of salaries such as superannuation, long service leave, workers compensation, desktop technology, etc, allocated on a pro rata basis.

Direct dollar costs such as travel costs, payments to consultants, and printing costs incurred in the production and delivery of the product or service.

System depreciation costs related to the individual product or service (if product is not in the BIS).

Shared system depreciation costs, allocated according to usage (i.e. where a system is used for the production of more than one product or service, then only the costs associated with that product or service’s share of the system are included).
X

Costs for shared centralised resources such as central financial and personnel services; library services; facilities management etc.
X

GST

Note: = included
X = not included

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How should charges be structured?

ABS prices are structured to collect the relevant marginal or incremental costs of products and services, whilst taking account of issues such as:
  • the case for charging when additional dissemination costs are low; and
  • future demand, i.e. what will the market be for the product or service?

In setting the charges, the ABS has applied the guiding principle in the Guidelines (p. 45) which is to maximise the community's use of information while minimising their calls on taxpayer funding for products outside the BIS agreed by Government.


How should costs be calculated and allocated?

ABS has reviewed the costs of all its cost-recovered products and services against the Guidelines, including direct, indirect and capital costs. ABS has used the Fully Distributed Costing model for many years to allocate its costs and it works well in the ABS context. Under Fully Distributed Costing, overhead costs are allocated on a pro rata basis across the salaries of the staff involved in the creation and distribution of the product. It should be noted that by far the most significant cost item in the production and delivery of ABS products and services are staff salaries and salary on-costs. Attachment 6 provides a list of overhead categories used in the overhead calculation.

In addition, ABS allocates IT costs using the Activity Based Costing method and shared system costs are distributed according to usage.

Cost recovery charges are applied to a range of dissemination activities.


Table 2 - Summarises the costs included in these cost recovered products and services.


Product/ServiceCosts incurredCharging regimeHow Costs are Recovered

Printed PublicationsPrinting and postageMarginally chargedAd hoc sales

Information and Statistical Consultancy ServicesLabour costs which comprises salaries and associated on-costs and corporate overheads, infrastructure costs which comprise system cost, and any direct costsIncrementally charged Ad hoc services

TrainingAll salary and information technology costs and direct costs associated with preparation and presentation Incrementally charged (a)Courses provided on demand

User Funded SurveysAll salary, information technology and direct costs Marginally charged (b)User funding

Microdata AccessLabour charges to cover administrative processes and information technology charges where appropriate Marginally chargedAd hoc sales

Note:
(a) free for training related to products and services in the BIS.
(b) commercial pricing applies if the surveys are won through a competitive tendering process
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Calculating capital costs


Depreciation has been included in the costs as shown in Table 1. However, the other component of capital costs - user cost of capital - has not been included in the setting of ABS prices. According to the Guidelines (p. 46), "the user cost of capital represents the opportunity cost of funds tied up in the capital used to deliver products. It is the rate of return that must be earned to justify retaining the assets in the medium to long term." The Department of Finance and Administration (DoFA) advised the ABS that the discount rate annually published for assessing business cases (10%) would be the best proxy for the opportunity cost of capital to the Commonwealth. However, this cost is zero for cost recovery activities that are funded from revenue, as is the case with ABS products and services.


Efficient costs

The Guidelines require that cost estimates should be based on “efficient costs”. Cost recovery arrangements should deliver prices that are based on the minimum cost necessary to deliver the products and still maintain quality over time. If a system is poorly designed and inefficient and expensive to run, then prices should reflect only what costs are deemed to be “efficient” in relation to the system.

“Efficient costs” may be established by comparison with the market where similar systems exist for example by benchmarking. ABS assesses itself on an ongoing basis against external benchmarks. The following examples are provided by way of illustration:

Efficient labour costs - for example:
  • Use of Gartner Service for benchmarking IT costs;
  • ABS staff members' professional and technical qualifications;
  • As evidence of cost efficiency in the delivery of information consultancy services;
hours are monitored;
quotes are authorised and monitored by senior staff;
allowance is made for new starters as against experienced staff;
inter-office benchmarking is undertaken; and
international benchmarking is undertaken.

Efficient materials costs - for example:
  • outsourcing by tender.

In arriving at final costs, the ABS ensures that only the minimum costs necessary to deliver the final product or service are included.


Transparent costs

The ABS has developed costing models which allow for the detailing of actual costs and how those costs relate to prices in sufficient detail to allow stakeholders to analyse ABS production costs. These models include details on how capital and overhead costs are allocated amongst products. All costing and pricing information is contained in a corporate pricing database. This database uses internally designed templates to capture as accurately as possible the costs - marginal or incremental - of providing the product or service. A pricing plan template is also included. Costing and pricing policy are contained in a corporate client service manual.


ABS contribution to costs (partial cost recovery)

During its review of cost recovery, the ABS identified a number of ongoing partial cost recovery arrangements. These partially cost recovered products and services have historically been provided in small numbers and to clearly identified groups of clients for a substantial period of time. As they are funded by existing government appropriation, there is no risk that they are being cross-subsidised by cost recovery amongst other client groups.

The cost of these ABS products and services are partially cost-recovered to different client groups to meet various Australian Government and/or ABS policy requirements. As the Australian Government Cost Recovery Guidelines do not provide for partial cost recovery activities, the ABS seeks the Government’s agreement for ABS to continue with these activities.

These products and services meet many of the tests of inclusion in the basic information set including being non-rivalrous, non-excludable and having substantial spillover effects. Their provision to narrow, identifiable groups prevents their being included in the basic information set.

The Guidelines suggest that these products and services should be marginally costed, however, this model does not take account of their specific purpose in meeting Government policy objectives or furthering international obligations. In some cases, marginal costing is not appropriate as charging is not cost effective.

On the other hand, provision of these products and services for free may create an unnatural increase in demand, thereby driving up production costs for some of these products and services. Rationing use by way of charging a portion of the retail price ensures that these services are not over-utilised or abused, while still maximising access to ABS data to these specialised groups of users.

Attachment 7 outlines those groups for which partial cost recovery is currently provided in the ABS, the nature of the partially cost recovered service, and the rationale in each case. These partial cost recovery arrangements are guided by Government Cost Recovery guidelines to the greatest extent possible.

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