Budget the services you will deliver, not the departments you funded last year.
Most public budgets are last year's spend plus or minus a percentage, allocated to departments and headcount. That funds inputs, not the services citizens receive, and it makes efficiency impossible to measure or defend. Activity-based budgeting is the same time-driven model run in reverse: take the planned volume of each service, multiply by its true cost per case, and build the budget on what the services will actually cost to deliver.
Cost and Profitability Consulting · 150+ engagements since 2010 · TDABC
Activity-based budgeting is TDABC run in reverse: planned service volume times true cost per case, summed across all services, instead of last year's departmental spend plus a percentage. It builds a budget on what services will actually cost, defensible service by service, and it exposes the cross-subsidy a flat overhead hides. The framing is value for money, not profit. The transversal evidence applies: traditional costing spreads overhead by volume, so complex, low-volume work comes out cheaper than it is, and practical capacity is a working convention at 80 to 85 percent of theoretical, with the idle slice rarely measured. We apply the method, not an invented public-sector benchmark.
Funding a department tells you nothing about a service.
A budget built on departments and headcount answers the wrong question. It says how much each part of the organisation may spend, not what any service costs to deliver or whether it delivers value for the money. Roll that forward year after year with a percentage adjustment, and inefficiency compounds invisibly: a service whose real cost per case has drifted far above the value it returns looks no different in the budget from one that is lean, because neither is costed at the service level at all. Without a true cost per service, leaders cannot redirect resource deliberately, cannot defend a cut or a bid with evidence, and cannot tell efficiency from austerity.
Inputs, not outputs
Funding departments and line items hides what the citizen actually receives. The cost of one permit, benefit or inspection is never isolated, so it cannot be managed.
Last year plus a percentage
Rolling the prior budget forward bakes in every existing inefficiency and every existing cross-subsidy, year after year, with no service-level evidence to challenge it.
Shared services as flat overhead
IT, HR, facilities and legal are charged as a flat spread or not at all, so departments neither see nor own what they consume, and cross-subsidy stays invisible.
Idle capacity unmeasured
Staff, offices and systems cost money when idle. Practical capacity is 80 to 85 percent of theoretical, and the unused slice is pure inefficiency with no revenue to offset it.
FUND DEPARTMENTS, OR COST SERVICES?
Illustrative. ABB reverses the arrow: from a budget allocated to departments to a budget built on the planned volume of services and their true cost per case.
Cost the service forwards, budget it backwards.
The same two parameters that cost a service forwards build the budget backwards. Forwards, a time equation gives the true cost per case of each service. Backwards, you take the planned volume of each service for the coming year, multiply by that cost per case, and sum across all services. The result is a budget grounded in what the organisation intends to deliver and what it will genuinely cost, not in what each department happened to spend last year.
Service cost (forwards) = staff time per case x staff capacity cost rate + facilities, systems and shared-service cost consumed + share of central overhead by activity consumed Activity-based budget (reverse): Service budget = planned case volume x cost per case summed across all services = a budget built on what services will cost, not last year's spend
Illustrative structure, not a measured benchmark. The reverse run turns a cost model into a budget grounded in planned output.
Turn overhead into a priced catalogue.
The most stubborn cross-subsidy in government sits in shared services. When IT, HR, facilities, finance and legal are charged as a flat overhead or not at all, departments have no reason to economise and no way to see who funds whom. Menu-based costing turns those internal services into a priced catalogue: each shared service has a true cost per unit, and each department sees and owns what it consumes. The cross-subsidy that was invisible becomes a deliberate, defensible choice, and the shared-service providers gain a reason and a measure to become more efficient. Combined with ABB, it lets an organisation build a budget where every euro is traceable to a service and a consumer, which is the foundation for proving value for money rather than asserting it.
Frequently asked questions
- What is activity-based budgeting in the public sector?
- ABB is TDABC run in reverse. Instead of starting from last year's departmental spend plus a percentage, you take the planned volume of each service and multiply by its true cost per case, building a budget on what the services will actually cost to deliver.
- How is ABB different from traditional budgeting?
- Traditional budgeting funds departments and inputs and rolls last year forward. ABB funds the planned output of services, costed from the activities that deliver them, so the budget is defensible service by service.
- What is menu-based costing of shared services?
- It turns internal services such as IT, HR, facilities and legal into a priced catalogue, so departments see and own what they consume instead of carrying a flat, invisible overhead. Cross-subsidy becomes visible and deliberate.
Build a budget you can defend service by service.
The Profit Check needs no data upload. It points to where an activity-based budget would change what you fund and what you can prove, and where the cross-subsidy hides.
- Duration
- 10 minutes
- You receive
- Score, 7 dimensions, sector benchmark
- Price
- Free, no email needed
Proof
A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.
Read the case study →Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Presented the Damco cost-to-serve case at Managing for Profit (Amsterdam RAI, December 2009), on the same programme as Robert S. Kaplan.
Call +351 910 313 731
Workshops
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One working profitability model, built from real data, that you take home at the end.
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Reviewed by
Miguel Guimarães
Founding Partner, Cost and Profitability Consulting
More than 150 Time-Driven ABC engagements across 11 sectors since 2010, working within the Kaplan and Anderson framework.
About the author →Published
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- 1Time-driven activity-based costing: ABC made simple and scalable
- 2Whale Curve: Definition, How to Build One, Live Simulator
- 3Cost-to-Serve Analysis
- 4Cost-Volume-Profit (CVP) and Break-Even Analysis
- 5TDABC vs ABC: same goal, very different effort
- 6How to calculate cost to serve, step by step
- 7Make-or-Buy and Relevant Costs
- 8Transfer Pricing for Internal Profitability
- 9Pocket Price Waterfall and Price Realization
- 10How to Build a TDABC Model