Guide to the Costing of Outputs
in the Government of Canada

Office of the Comptroller General
February 1989
Note : Minor editorial amendments were made in 1994 by the Financial and Information Management Branch, Treasury Board Secretariat to bring departmental references and document references up to date.
Published by
Communications Division
Treasury Board of Canada

Table of Contents
Introduction	1
1  How to Apply the Guide to Different Costing Purposes	2
2  Guidelines for Costing of Outputs	4
3  Recommended Costing Procedures	17
A.  Cost Elements to be Considered	17
B.  Charge for the Use of Capital Assets	18
C. Cost of Capital	19
Appendix I - Definitions of Key Terms and Concepts	21
Appendix II - Case Study	24

Introduction
This guide serves as a model for costing outputs in a variety of situations, including rate development for cost recovery and the costing of results within the Operational Planning Framework (OPF). To this end, definitions of basic cost accounting terms and concepts are provided. In addition the steps that would typically be followed in the costing of outputs are discussed, together with the decisions that must be made at each step, and the cost components and calculations required to support each decision. The guide concludes with a case study.
The guide has four sections:
1.	How to apply the guide to different costing
2.	Guidelines for costing of outputs. This section is intended to provide departments with a “road map” for the costing of outputs, outlining the steps typically required.
3.	Recommended procedures for a number of cost accounting issues that generally need to be addressed in the costing of outputs. The recommended procedures are intended to ensure that a consistent approach is followed across the government.
4.	There are two appendices:
Appendix I:	defines costing terms and concepts to ensure consistency of usage; and
Appendix II:	presents a case study to illustrate how the guidelines can be applied.
This guide is intended to assist departments in meeting their cost accounting responsibilities. It is not intended as a mandatory set of policies, but rather to provide guidance. Departments may use other costing approaches that are different from those suggested in this guide when warranted by the nature of their operations, the purpose of the costing exercise or the stage of development of their cost accounting processes and systems.

1	How to Apply the Guide to Different Costing Purposes
The concepts set out in this guide are relevant to all cost accounting applications. The cost elements to be considered in a particular situation, however, depend on how the information is to be used separate guidelines will be issued for some cost accounting applications, such as the comparison of private sector and public sector program delivery.
While the guide encourages full costing to support some applications, care must be taken not to obscure the reporting of costs for which managers are to be held accountable. Any allocation of departmental overheads to a particular responsibility centre should be identified separately from costs under the manager’s control.
The following is a brief description of the main applications of cost accounting in government and the relevant costs in each case.
Cost Recovery
Cost recovery refers to setting user fees to cover some or all of the costs incurred in providing a product or service, rather than funding the product or service solely out of general tax revenues. The full costing of outputs to support cost recovery rate-setting decisions does not necessarily mean that all costs will be recovered. The recovery of less than full cost may be justified on policy, program or administrative grounds. For guidance in setting fees, refer to the Treasury Board User Fees Policy.
Where full cost recovery is warranted, direct costs, overheads, depreciation of capital assets and cost of capital are relevant for costing purposes. A definition of full costs is provided in the glossary at the end of this document.
Make-or-Buy Decisions
An assessment can be made of whether the delivery of a service or a product to users is more efficiently performed by the government or by an outside contractor. For these decisions, relevant costs are limited to those that would change depending on which option is selected.
Refer to the Treasury Board’s guide – Stretching the Tax Dollar – Make or Buy?, September, 1993. 
Level of Service Decisions
These are decisions made by managers on the appropriate level of service to provide to users. Relevant costs are those that will change as the level of service is adjusted. For example, a lower level of service may reduce the person-years required and the associated costs. This may have implications on the level and cost of overhead functions in support of program delivery personnel. The relevance of non-cash costs such as depreciation depends primarily on whether the analysis is being performed to determine funding implications or to portray the economic impact of alternatives. Non-cash costs would be considered only in the latter case.
Benefit/Cost Decisions
Benefit/cost decisions involve assessing alternative courses of action such as whether or not to launch a program, whether to acquire an asset or which type of asset to acquire. Relevant costs for these decisions are those that change between the competing options. Usually non-cash costs such as depreciation are not relevant to these decisions.
If the cost of acquiring or disposing of capital assets is relevant to a given benefit/cost decision, a net present value methodology should be applied to cash flows in order to compare alternatives. If the overhead infrastructure already exists and will not change between alternatives, then the associated costs are not relevant. Relevant costs and methodologies are described in depth in the Treasury Board Benefit-Cost Analysis Guide, ISBN 0-660-11215-9.
Investment Decisions
These are decisions concerning the acquisition of assets; they are a type of benefit/cost decision. They are usually supported by “life-cycle costing” which captures or predicts all the capital and operating costs of an asset over its lifetime. This in turn assists decision makers in determining when and with what to replace the asset.
Operational Planning Framework (OPF)
The cost accounting guidelines that are included in this guide can also be applied to the costing of results within the OPF and the development of associated performance indicators. When submitting OPFs to the Treasury Board for review, it is appropriate to describe the cost accounting principles underlying the proposed framework

2	Guidelines for Costing of Outputs
Costs refer to resources expended to achieve a particular result, such as a service, a product or an asset, and can include expenditures from more than one fiscal year. Cost accounting refers to the processes whereby resources are attributed to results.
The information required for cost accounting purposes resides in departments. It can be derived from data used to control appropriations and allotments. There is a need, however, to organize and manipulate these data into a useful form for management decision-making.
There are six steps to the costing of outputs:
•	define the purpose for which cost accounting is needed;
•	define the outputs to be costed;
•	determine the cost base;
•	determine the required cost allocation processes;
•	select allocation bases; and
•	perform the relevant calculations.
Step 1 : Define the Purpose of the Cost Accounting Exercise
An important first step in any cost accounting exercise is to understand why it is being done; that is, what decision the cost accounting is intended to support. The kinds of costs that are included in the costing, the degree of detail and the rigour in cost allocation will vary depending on how the information is to be used.
Responsibility
The responsibility for determining why cost accounting is required rests with senior departmental management. The cost accountant should ensure that he or she understands the decisions for which senior management requires cost accounting. It is the responsibility of managers at all levels to be aware of decisions that will affect costs, and to suggest the development of methods of costing that will provide better information to support such decisions.
Tasks
Depending upon the costing application, the cost accountant will need to obtain and review:
•	departmental strategic and operational planning documents, in particular the Operational Planning Framework (OPF). The OPF often contains the best formal description of outputs in the form of key result areas and performance indicators;
•	relevant Memoranda to Cabinet, such as any on cost recovery, program changes, service level changes, etc.;
•	the “user fee revenue plan” which must be submitted to the Treasury Board with the Multi-Year Operational Plan, and which should represent the best source of information on cost recovery initiatives;
•	Part III of the Estimates; and
•	central agency directives and circulars.
In addition, the cost accountant will probably need to interview management to clarify needs.
Results
The result of the first phase of the costing process should be a brief “user needs” summary that sets out: the purposes for which cost accounting is required in the department;
•	the specific kinds of decisions that cost accounting is intended to support;
•	in conceptual terms, the kinds of costing information required to support each kind of decision; and
•	the frequency with which the information will be required.
This “user needs” document should be presented to senior departmental management for review and approval.
Step 2 : Define the outputs to be costed
Cost accounting in government is generally used to determine the costs of outputs. These might be services or products, and are the focus of decisions such as the setting of user fees (whether full cost recovery or otherwise) and levels of service.

The definition of outputs is an important step in the process as the outputs represent the target for all costs, and greatly influence the design of the cost accounting process.

Responsibility
The definition of outputs for cost accounting purposes is a joint responsibility of program and financial management. Program managers have the most knowledge about the nature of their programs’ outputs. Financial managers can provide advice on the cost accounting feasibility (including the cost) of alternative definitions of outputs for costing purposes. The relative involvement of representatives from each of these two groups will differ between departments, depending on the division of responsibility and the particular situation in a given department.
Tasks
The department’s cost accountants and program managers should define the outputs to be costed clearly and completely. A structure leading from programs through activities to outputs should be developed.
In order to assist in the development of the program-activity-output hierarchy, the program managers and cost accountants should review:
•	the department’s OPF, which defines key result areas and the program activity structure;
•	the User Fee Revenue Plan, which defines services for which user fees will be charged; and
•	price lists or fee schedules for the department’s goods and services.
Results
The result of this step should be a program-activity-out-put structured which shows which activities lead to which outputs.
The following are examples of such a structure (they are for illustrative purposes only and do not necessarily represent actual situations):
Department	Program	Activity	Sub-Activity	Output	
Transport	Air Transportation	Aviation	Air navigation	En route services services to carriers using Canada’s air space	
Public Works and Government Services	Realty management	Property management	Building maintenance	A maintenance square metre of space	
Natural Resources 	Surveys and mapping	Mapping	Drafting	Map	

Typically, there will be numerous activities and outputs for each program. The structure for each should be developed. In some cases an activity will result in several outputs, or several activities may contribute to produce a single output. This relationship between activities and outputs must be depicted as accurately as possible. Where the activity structure has many layers (down to the sub-sub-activity level or lower), these should all be reflected in the structure.
Step 3: Determine the Cost Base
This step entails assembling all the costs that are relevant in the costing of the outputs for a particular application. The types of costs that should be considered for inclusion in the cost base are:
•	direct program costs;
•	program support overhead;
•	corporate and administrative (C&A) overhead;
•	costs of products and services provided at no charge by other departments, including central service departments such as Public Works and Government Services;
•	a depreciation charge for the capital assets used directly and indirectly in producing the outputs;
•	the cost of capital associated with the assets used directly and indirectly to produce the outputs; and
•	the cost of provincial sales taxes paid.
Each of these categories of costs is defined in Appendix I – Key Terms and Concepts. The recommended procedures for categorizing and for calculating depreciation and cost of capital are set out in Section 3 – Recommended Costing Procedures.
Responsibility
The responsibility for developing the cost base for cost accounting rests primarily with the department's financial management staff, specifically the cost accountants. Program managers will be able to assist in identifying the cost categories that apply to each output and in defining the relevancy of the costs.
Tasks
The following are the tasks required to determine the cost base and related categories (the precision of the data should be balanced against the cost of gathering it):
•	Obtain the department's operating and capital budgets for each program broken down by program and activity to the lowest level of detail available (e.g. sub-activity or sub-sub-activity). N.B. From standard object 01, only Basic Pay (usually economic objects 0101 and 0102) will normally be included at the outset.
•	Obtain the current standard benefits percentage which is to be applied to Basic Pay. Please refer to page 10, which outlines where this percentage can be obtained.

•	Determine which costs identified in the budgets are direct, which are program support and which are corporate and administrative services. This may entail interviews, particularly to break down costs between direct and program support. For a definition of direct costs see page 16.
•	Ensure that all costs are allocated to one of the three main categories.
•	Obtain records of the cost and net book value of the department's fixed assets, including land, buildings and movable assets such as equipment, computers and motor vehicles, and break down by program and activity, to the same level of detail as the direct program costs. (Fixed assets are defined in Appendix I)
•	Determine the useful lives of the assets and calculate depreciation. Add this to other costs by sub-sub-activity.
•	Determine the average value of any material amount of inventories or supplies held specifically for the outputs being costed.
•	Apply the prescribed cost of capital percentage to the net book value of fixed assets and, if material, to average inventories. Add the cost of capital calculated to the program costs and depreciation.
•	Obtain information on costs of services provided by other departments and add to the appropriate category of departmental costs (see further details on page 13).
Result
At this stage of the costing process, the costs to be taken into account in the costing exercise will be accumulated and will be segregated into the three main pools, namely C&A, program support and direct. Direct costs will be broken down by sub-subactivity, or the appropriate low-level split of activities.
This might be depicted as in the diagram above.
Step 4: Determine the Required Cost Allocation Processes
The next step in the costing process is to define what allocation processes are required to move costs from where they are captured to where they are targeted, namely to the outputs.
Generally, three types of allocations will be required for a full costing of outputs:
1.	Allocation of C&A costs to programs.
2.	Allocation of each program's share of C&A costs, plus its own program support costs, to the most detailed level of activity (sub-sub activity) for which direct costs are available.
3.	Allocation of "full" activity costs (after allocation of C&A and program support costs) to outputs.
These three stages of allocation are illustrated below:

In most cost accounting situations, overheads are a highly complex issue. To begin with, organizations define and categorize overheads differently. What one organization refers to as an overhead, another considers a direct cost. Similarly, some overheads could be considered to be either corporate and administrative or program support, depending on how an overhead function is organized and where it reports (which varies from organization to organization). Also, the allocation of overheads is an art requiring significant judgement. There are few "right answers" in overhead allocation, but reasonable assumptions should result in fair costing practices.
Responsibility
The responsibility for defining the necessary allocation processes rests with the department's financial management staff, specifically the cost accountants. However, the definitionequired allocations will require extensive consultation with program managers, particularly on the method used to allocate costs to outputs.
Tasks
The following tasks should be performed to determine appropriate cost allocation processes:
•	Assess whether each program's sub-sub activities are homogeneous enough to permit a direct allocation of overheads or whether overheads should first be pooled at some intermediate level for allocation. A pooling at an intermediate level would be required where a program has activities that are so different that allocation of overhead to all of them in one process would be impractical.
For example, if a program produces some outputs best measured in terms of units and others best measured in terms of labour-hours of service, there may be no way of establishing a common denominator for allocation of overheads. Separate allocations may first have to be done to the program elements responsible for the two types of outputs. There would then be separate allocations to the two different outputs.
•	Review the relationship between sub-sub activities and outputs. Assess whether there is some measurable basis (such as labour-hours) for attaching the costs of activities to outputs, or whether judgmental allocations are required.
For example, if a program's services are measurable by labour-hour or machine-hour it may be relatively easy to cost these services. If, however, the services do not have as direct a relationship with inputs, as in the case of services to provide data, there may be a need for judgmental bases of allocation.
Results
The results of this process will be a document that sets out the pools of costs that should be accumulated for allocation, and that describes the specific processes required to attach these pools of costs to outputs. It will define the route that will have to be taken in moving costs from where they are captured in  the department to where they are required for costing of outputs.
Step 5: Select Allocation Bases
While Step 4 will define the required cost allocation processes, Step 5 will define the specific allocation bases. As noted in Step 4, allocation attaches costs to outputs and normally takes place in three steps under a full costing scenario:
•	allocation of C&A overhead to programs;
•	allocation of program support overhead (and the program's share of C&A overhead) to sub-sub activities;
•	allocation of the full costs of sub-sub activities to outputs.
To effect each of these allocations, bases must be defined that best represent the relationship between the cost being allocated and the programs, activities or outputs to which they are being allocated.
Responsibility
The responsibility for selecting the most appropriate bases of allocation rests with the department's cost accountants or appropriate financial personnel. They will need to consult with program staff in order to understand the factors that "drive" the costs that will be allocated.
Tasks
The tasks required of the cost accountant in selecting the allocation bases are discussed separately for each major allocation process.
(a)	Allocation of C&A overhead to programs
•	Obtain a listing of the main components of C&A - e.g. finance, personnel, informatics, etc. (refer to Appendix I for a full definition of C&A).
•	Interview a representative of each C&A overhead branch to determine the operational activity that is the "cost driver" for that class of overhead. For example, for the personnel branch, the number of person-years may be the most appropriate "cost driver". For finance it may be gross expenditures.
•	Based on the interviews, determine whether one or more bases of allocation are required to allocate C&A overhead to programs. It may be possible to use one basis such as person-years in each program, if it is determined that this is the key cost driver and that it would not make any material difference if a more complex approach were used.
•	On the other hand, if the programs use the different overhead services in very different proportions, it may be necessary to use different bases of allocation for each overhead category.
•	There is a benefit/cost trade-off to be made in the selection of appropriate bases. Particular bases that will provide the most accurate results may be too costly to apply if the base data are not readily available within the department.
(b)	Allocation of Program Support and C&A Overheads to Sub-Sub Activities:
•	For each program, obtain the direct cost budgets for each sub-sub activity to which overhead costs need to be allocated.
•	Determine the operational variable that best measures the sub-sub activities' use of overhead services. This would normally be one of: 
person-years;
labour costs;
operating budget; or
capital budget.

•	If a program's direct costs are primarily labour related, person-years or labour costs will probably be the most appropriate basis for attaching overheads to the direct costs of sub-sub activities. On the other hand, if direct costs are more diverse, total operating budget, or capital budget may be a better approach.
(c)	Allocation of Sub-sub Activity Costs to Outputs
•	Determine how outputs are measured.
•	Determine if more than one sub-sub activity results in a single output or whether several outputs are the result of a single sub-sub activity.
•	Where more than one sub-sub activity results in a single output, costing outputs entails the division of sub-sub activity costs by the quantity of outputs.
•	When single sub-sub activities give rise to several outputs, consult with program management to determine the proportion of costs that relate to each output. After these costs have been allocated to each type of output, then the unit cost of each output can be calculated based on volumes.
Accumulation of Costs by Sub-sub Activity
Sub-sub activity title and code	

Direct cost	

Benefits	

Depreciation	
Cost of Capital	

Overhead	

Total costs	
1	2	3	4	5	6	7	

Results
At the end of this step, the specific allocation bases for attaching costs to outputs will have been defined. These will, in effect, represent the formulae whereby all costs in the department can be attached to the department's outputs to support full costing initiatives. And, while full costing is not relevant to all costing applications, even under a direct costing scenario, costs must be linked to outputs.
Step 6: Perform Calculations
The purpose of this section of the guide is to summarize the above steps into the calculations that have to be performed once all of the cost accounting approaches and allocation bases have been determined.
In performing the calculations, one should not seek a level of accuracy greater than that which is required. Immaterial costs can be estimated or omitted.
Responsibility
The responsibility for performing the calculations and providing the functional guidance required rests with the cost accountants.
Tasks
The following tasks apply to the full unit costing of outputs. Certain aspects would be omitted or changed for other applications. For example, Step 3 (depreciation calculation) does not apply to make-or-buy decisions.
1.	Obtain the department's operating and capital budgets, (including Basic Pay) for each program, analyzed down to the lowest level of activity in the department's program activity structure. Enter the direct costs for each sub-sub activity on a spreadsheet as illustrated below column 2.
2.	Apply the standard benefits percentage to Basic Pay costs included in each sub-sub activity's costs. This figure is available from the Information and Analysis Division, Staff Relations Branch, Treasury Board Secretariat. (For a full definition, including the current percentage, refer to page 16). Enter on the spreadsheet, column 3 (previous page).
3.	Obtain a list of the historical costs, book values and useful lives of fixed assets associated with each sub-sub activity. Calculate an annual depreciation charge based on historical cost using straight line or a method which is more appropriate to the asset. Enter depreciation in column 4 (previous page). Refer to the recommended procedure on depreciation, page 14.
4.	Obtain the average value of inventories currently on hand to support each sub-sub activity for the cost of capital calculation. If the inventories are insignificant they may be ignored. Only material values of inventories need be included in calculating cost of capital.
Costing of Outputs
Output description	Sub-subactivity costs related to outputs	Basis for allocating sub-sub activity costs to outputs	Cost of outputs	Output volumes	Unit costs of outputs	
1	2	3	4	5	6	

5.	Determine a cost of capital by sub-sub activity by applying an appropriate cost of capital percentage to the average net book value of fixed assets and to the average value of inventories (if material). The cost of capital rate would normally be the Consolidated Revenue Fund (CRF) Lending Rate (based on the government's cost of borrowing) which is obtainable from the Public Debt Section, Informatics and Financial Services Directorate, Department of Finance. The rate is adjusted monthly. (Refer to "cost of capital", page 14). Enter cost of capital in column 5 (previous page).
6.	Obtain the full costs of services provided at no charge or on a cost recovery basis by other government departments providing central services, such as Public Works and Government Services. These costs or standard application factors are available from those departments. These costs should be added to C&A overheads unless they are attributable to particular programs or sub- sub activities. Certain costs of other government departments (OGD) services such as those supplied by the Department of Justice may not be sufficiently material for inclusion in the cost base. Refer to the procedures section of this document for a detailed discussion of the treatment of OGD costs, including the full costing of partially recovered inter-departmental charges. N.B. : Exclude charges for OGD services already included in the budgets referred to in 1. above.
7.	Allocate C&A overheads, including the costs of services provided by other departments (where they are relevant and material) to the department's operational programs, using appropriate allocation bases, such as person-years, labour costs etc.
8.	Allocate program support and C&A overheads for each program to the program's sub-sub activities, using appropriate allocation bases such as person-years, labour costs etc. Enter the total overhead allocated to sub-sub activities in column 6 of the spreadsheet.
9.	Total the costs of each sub-sub activity for each program and enter the total in column 7.
10	Obtain a listing of the outputs of each program. Relate the sub-sub activities to the outputs. Where necessary, add several sub-sub activities' costs together to relate them to one type of output. Alternatively, split particular sub-sub activities' costs into segments related to several different types of outputs. Where the costs of a sub-sub activity must be split among several outputs, it should be done using an allocation basis agreed to by program management, such as a fixed percentage allocation. List all sub-sub activities, outputs, bases for allocating sub-sub activities' costs to outputs and the resultant costs of outputs, as illustrated below, columns 1-4.
11.	Obtain projected output volumes. These should be average volumes for a number of years rather than a single year's volume or a maximum capacity volume. This will ensure that unit costs do not vary dramatically from year to year and are set at realistic rather than "ideal" levels. Enter volumes on the spreadsheet column 5 (previous page).
12.	Divide output costs by volumes to arrive at unit costs. Insert in column 6 (previous page).
Results
Upon the completion of this step, the unit costing of outputs has been achieved. If all the tasks were performed and costs included as identified above, the result would be a full unit costing of outputs. This may be appropriate in determining full cost recovery rates. For a make-or-buy decision, only those costs that will be affected by the decision are relevant. For a benefit/cost decision of alternative program options, it may not be appropriate to include C&A overheads or even program support. In this case, the direct costs would be attached to the "outputs" or "cost objects" of different options so that a comparison could be made. Direct costs in this instance may include not just operating costs but also capital costs which will change depending on the selected option. (The Treasury Board Benefit-Cost Analysis Guide, ISBN 0-660-11215-9 provides a detailed methodology on how to perform such analyses)

Guidelines for Costing – A Summary			
Step	  Organizational Responsibility	  Required Information	
1.	Define purpose of the cost accounting exercise	•	Departmental top management	•	Departmental strategic plans
•	Relevant Memoranda to Cabinet
•	User fee revenue plan
•	Part III of the Estimates
•	Information needs of management
•	Central agency circulars, policies and directives
•	Audit reports	
2.	Define "outputs" to be costed		Program and financial manager	Price lists/fee schedules
Operational planning framework
User fee revenue plan
Part III of the Estimates	
3.	Determine cost base		Program and financial managers	•	Departmental operating budgets by sub-sub activity
•	Capital budgets
•	Fixed assets with historical costs and net book values, by sub-sub activity
•	Useful lives of assets
•	Cost of inventories used in program activities, if material
•	Costs of services provided by other government departments
•	Costs of employee benefits	
4.	Determine required cost		Financial management, particularly		Hierarchy of costs broken into allocation processes cost accountants, in consultation pools of direct, program support with program management and corporate overhead
	CRF Lending Rate	
5.	Select cost allocation bases		Cost accountants and program		The "cost drivers", which cause management each category of costs to be incurred	
6.	Perform calculations		Cost accountants		Costs, broken down into categories of overhead and direct by sub-sub activity
	Allocation
	Average volumes of outputs	

3	Recommended Costing Procedures
A.	Cost Elements to be Considered
Purpose 
To set out the types of costs that would normally be included in the cost base for the costing of outputs, and to show how these costs should be categorized.
Application
The costs to be included in the cost base will vary, depending on the purpose of the cost accounting exercise. Accordingly, departments should tailor the procedure to fit the purpose.
Procedure
1.	The following are the categories that should be included in the cost base for the full costing of program outputs:
•	Direct costs of the sub-sub activities in the operating and capital budgets, including Basic pay (usually economic objects 0101 and 0102).
•	Where the budgets include costs for services provided by OGDs that operate on a partial cost recovery basis, the OGD costs should be augmented to achieve full costs if this is relevant and material to the purpose of the costing. Either an estimate of full costs or a percentage application factor can be obtained from the servicing department.
•	Contributions to employee benefits. These include costs borne by Treasury Board Secretariat, by Human Resources Development and by the department itself. Refer to the rate discussed on pages 10 and 16.
•	A depreciation charge for fixed assets directly used in the delivery of the outputs (see page 14 "charge for the use of capital assets").
•	A cost of capital charge on the assets and inventories used directly in the delivery of the outputs (see page 14, "cost of capital").
•	A share of the overhead of the program that is delivering the outputs. The program-specific overhead is referred to as program support overhead and is distinct from a department's overhead associated with corporate services (see corporate and administrative services below).  The program support overhead that is allocated to an output should include direct costs, depreciation on program support fixed assets (as opposed to fixed assets used directly in delivering outputs) and a cost of capital associated with the program support assets.
•	A share of the department's corporate and administrative services (C&A) overhead. C&A overhead consists of the cost of the service branches, which are not part of any of the operating programs. Some of the C&A categories, such as personnel, informatics, finance and administration, fall within the administration program. Others are of a corporate nature, such as senior or executive corporate management. Further categories of C&A overhead include legal services, program evaluation, and audit. C&A overhead that is allocated to an output should include operating costs, depreciation or charge for capital, and cost of capital on C&A assets.
•	The full costs of services provided at no charge by other government departments should be included where relevant and material. These costs should be combined with the C&A overheads and follow through the allocations accordingly, unless they can be specifically attributed to a particular program or sub-sub activity. The same principle applies to services that are currently charged for and not already included in the budgets. Examples of services presently provided at no charge by OGD are itemized below along with the providing department or agency. Estimates of these costs can be obtained either in Part III of the Estimates (adjusted to give full costs, if not already on that basis) or from the departments or agencies providing the services.
Costs Incurred for:	Provided by:	
Accommodation	Public Works and Government Services 	
Accounting & cheque issue services	Public Works and	
Legal services	Justice	
Space at airports	Transport Canada	

2.	It is acceptable, indeed often desirable, to use a standard application factor to account for certain costs. As discussed, a benefits percentage can be obtained from the Information and Analysis Division of the Treasury Board Secretariat (see page 10) or from departmental calculations, and applied to the relevant salary dollars. A single departmental C&A factor can be applied to the direct and program support costs to estimate the C&A costs. This factor can be calculated for the department as a whole from data available in Part III of the Estimates, and then applied in particular costing situations. The cost of OGD services can also be estimated for the department as a whole, and a percentage factor derived for future use.
3.	There are costs that should be excluded from the cost base for the costing of outputs; for example, costs of the central agencies of government other than insurance costs borne by Treasury Board Secretariat noted in 1 above. These central agency costs do not represent services to the department. They are incurred for monitoring and coordination purposes and are analogous to the activities of a holding company.
B.	Charge for the Use of Capital Assets 
Purpose
To indicate how a charge for the use of capital assets should be calculated if it is relevant to include it in the cost base for the costing of outputs.
Application
It is appropriate to include a charge for the use of capital in many costing situations. The manner in which this cost is included depends on the purpose of the costing exercise. For example, capital assets should be taken into account in "most efficient organization" decisions by using market values net of salvage, and discounting at an appropriate cost of capital to derive the present value. On the other hand, a depreciation charge is appropriate in those situations that call for the full costing of outputs. Where the historical cost and the acquisition date are not available, appraised value or market value must be used.
Depreciation represents a measure of the fixed assets used in providing outputs. It is a cost that is not generally reflected in a department's accounting records and therefore needs to be specially calculated for costing purposes. It should be noted that the full unit costs including depreciation may fluctuate over time if the size of the capital pool fluctuates substantially. For the purpose of setting user fees, it may be desirable to smooth out these fluctuations. However, this does not affect the necessity of achieving a meaningful full cost, including depreciation.
Procedure
1.	For the full costing of outputs, depreciation should be calculated on all fixed assets used directly or indirectly in the provision of outputs.
2.	Where depreciation is a relevant cost, it should be based on the historical cost of assets. Where data are not available on historical cost, an appraised or market value could be obtained (keeping in mind the cost-effectiveness of obtaining an appraisal). Appraised values approximate current values. One can determine a straight-line depreciation charge based on the current market value and expected remaining useful life. If the department has information on salvage value and believes it is material, this amount should be deducted from the asset base.
3.	The cost base used (historical or market) should be noted with any costing of outputs.
4.	In the interests of simplicity and consistency, the method of depreciation used should be straight-line, unless this would materially misrepresent the timing of the benefits derived from the asset.
5.	If a depreciation method other than straight-line is used in any costing of outputs, it should be noted and explained.
6.	For the purpose of calculating depreciation rates, the useful lives of fixed assets should be estimated, taking into account the physical, technological (including risk of obsolescence) and economic factors that influence the period for which an asset will provide service.
7.	The useful lives used in calculating depreciation, and their source or rationale, should be clearly indicated.
C. Cost of Capital
Purpose
To indicate how cost of capital should be calculated for various costing applications.
Application
Cost of capital should normally be included in the base for the full costing of outputs. This cost is not reflected in the department's own accounting records and therefore needs to be specially calculated for costing purposes. If the cost is immaterial for a particular non-capital-intensive operation, then the department may elect not to include the cost of capital.
Procedure
1.	In calculating the full cost of outputs, cost of capital should be calculated on all fixed assets used directly or indirectly in the provision of outputs by departments and on significant inventories held to support the provision of outputs (see the definition of "full costs" in the Glossary, Appendix I).
2.	For full costing in support of cost recovery, the cost of capital calculation should be applied to the average net book value or market value (for the year for which the calculation is being performed) of the fixed assets and to the average value of inventories directly and indirectly associated with providing outputs. For make-or-buy decisions, the market value of assets is the relevant measure to use as the base.
3.	The cost base used in calculating the cost of capital for fixed assets should be disclosed.
4.	For full costing in support of cost recovery, the cost of capital rate to apply should be the CRF Lending Rate(see page 11)

Appendix I - Definitions of Key Terms and Concepts
1.	Activity – An activity is a component of a program, and is generally an element in a department's "program activity structure".
2.	Activity Base – The measure of activity used as the denominator in calculating unit costs. Examples include units of output, hours of service, person-years or number of invoices processed.
3.	Allocation Base – This is the base by which overhead costs may be allocated to direct and program support costs. The base may be an operating variable such as person-years or number of transactions, or it may be a dollar value such as total expenditures.
4.	Allocated Costs – Costs which cannot be directly attributed to the production or provision of a good or service such as certain fixed costs and which must be allocated on some other basis such as a predetermined percentage or a standard cost factor applied to an appropriate measure of the activity base. Costs allocated in this way generally include administrative overheads, accommodation, shared capital and shared inventories.
5.	Capital Cost – The cost of an asset with a life of more than one year. Capital costs usually relate to fixed assets that are purchased at specific times for future use over several accounting periods.
6.	Corporate and Administrative Services Overhead – Corporate and Administrative Services overhead (C&A) costs are costs incurred in support of the operating programs and activities in a department. They are incurred outside program branches, and include the costs of such functions as:
•	senior management,
•	corporate communications,
•	informatics,
•	personnel,
•	finance,
•	administration,
•	legal services,
•	program evaluation,
•	audit.
C&A costs can be incurred both at headquarters and in the regions.
7.	Cost Allocation – The assignment of a cost or group of costs to one or more programs, activities or outputs.
8.	Cost Base – The cost base is the total of costs that are accumulated for allocation to a program, activity or output.
9.	Cost Behaviour – The response that a cost element has to the effect of a cost driver or multiple cost drivers. For example, a cost may remain stable until a certain level of an operating variable is exceeded, whereupon it will increase (step-costs). Alternatively, costs may be completely fixed or variable with respect to a given cost driver.
10.	Cost Driver – The factor that determines how a cost will vary (behave) and the rate at which that cost will vary (behave). For example, number of transactions may drive data processing operation costs; person-years may drive personnel costs.
11.	Cost of Capital – The cost of capital represents the cost to the government of financing the assets used in carrying out its activities.
12.	Cost Pool – A grouping of costs that have been accumulated. The breakdown into pools may be based on cost category such as corporate and administrative, by organizational entity, by activity or by object of expenditure.
13.	Costs versus Expenditures – These terms are often incorrectly used interchangeably. Costs are expenses that can be associated with providing a  product or service. They may be capital or operating in nature, and once identified with a product or service can be carried in accounting records for several fiscal periods. Expenditures are those funds actually disbursed in a particular period.
14.	Depreciation – Depreciation is the process whereby the cost of tangible fixed assets is spread over the periods of expected benefits to be received from the use of those assets. It is not a cost that is recorded by most federal government departments.
15.	Direct Costs – Costs that would only be incurred as a result of the production or provision of a good or service and which are precisely attributable to their provision can be allocated directly to the good or service, and should be relatively straightforward to identify and measure. Normally these direct costs include: direct labour (including employee benefits); direct operating costs (such as travel, professional services, etc.); direct material costs; and capital acquisitions (to the extent that these capital acquisitions will form part of an output).
16.	Employee Benefits – These include employer contributions to employee benefit plans such as Superannuation, Canada Pension Plan, Quebec Pension Plan, Severance Pay and Unemployment Insurance Contributions paid by departments. They also include costs borne by the Treasury Board Secretariat such as the Disability Insurance and the Dental Plan as well as costs absorbed by Human Resources Development for Workers Compensation. For simplicity of calculation, a standard percentage can be added to Basic Pay for these employee benefits. At the time of writing of this guide, the figure was 17.1 per cent (this does not include overtime or allowances and premiums). A 1.5 or 3 per cent payroll tax must be added respectively for employees working in Manitoba and Quebec.
17.	Fixed Assets – Those assets owned by a department, including land, buildings, equipment, furniture and fixtures and motor vehicles. "Fixed Assets" includes both real property and movable assets, but excludes inventories that are consumed in the delivery of services or the manufacture of products.
18.	Full Cost – The sum of all costs, direct and indirect, incurred by the government in the supply of a good, service, property, or right or privilege, including: services provided without charge by other departments (e.g., accommodation, employer contributions to insurance plans); costs financed by separate authorities (e.g., some employee benefits); the financing costs of inventories; and annualized capital costs, including financing. However, since the primary focus of this guide is full costing for cost recovery, transfer payments have not been included.
19.	Goods and Services (G&S) – These costs comprise all the categories of operating costs except salaries and benefits.
20.	Historical Cost – The original cost that was incurred to acquire a particular asset.
21.	Incremental Cost – A cost that changes as a result of a change in production or a decision.
22.	Market Value – Current value of the asset as determined by an appraisal or a management estimate.
23.	Output – A product or service provided by the department.
24.	Product – A product is a tangible output generated by a departmental program. An example would be a publication produced by Statistics Canada.
25.	Program Support Overhead – Program support costs are costs of a program incurred in the performance of functions that are not directly involved with service delivery but support service delivery activities. This category includes all supervisory, management and policy personnel within a program branch. These costs may be incurred within the program branches at headquarters and in the regions, and are separate and distinct from corporate and administrative services costs, which are support costs incurred outside the program branches.
26.	Salaries – Salaries include the base salary, and overtime premiums.
27.	Salvage (Residual) Value – The salvage value of an asset is that amount of cash inflow which can reasonably be expected to be obtained upon the eventual disposal of a capital asset.
28	Service – A service is an intangible output generated by a departmental program. An example would be property management services of Public Works and Government Services' Realty Management Program.
29	Sub-sub Activity – A sub-sub activity is normally the lowest level of activity recognized on a department's program activity structure.
30	Throughput – Throughput represents the number of production units or outputs that have been processed through an operation. It may be related to a particular activity, or to an entire service. In a government setting, it may be the number of clients served or applications processed in a given period of time.
31	Unit Cost – A cost computed by dividing some total cost by an activity base. The denominator is a measure of activity that is related to total costs incurred.
Appendix II - Case Study
The following case is designed to illustrate full unit costing using the processes identified in these guidelines for costing of outputs. The case involves the fictitious Department of Sports and Leisure. Schedules have been set up to display the methods of cost pooling and the allocation of costs to  sub-sub activities and outputs.
Departmental Programs, Activities and Outputs
The flow of departmental activities to which costs will be attached is shown in the chart on page 18. Referring to the levels of the organization that were discussed in the guidelines section of this report, we begin with the department itself, which is Sports and Leisure. Within the department, we define the organizational levels and the terms we are using to describe them, as a given department may not use these exact terms in the context intended.
Corporate and administrative services are depicted at the top of the chart because costs at this level are incurred on behalf of all operational entities within the department.
Next we have the program level, which indicates that a group of programs make up the total output of the department. In this example we explore the costing methodology with respect to one of two programs in this department, namely the recreation program. This level of the chart represents program support costs. These are overheads which are incurred solely for a particular program.
Within each program there will normally be a set of activities which together form the program. Referring to the chart, one can see that we have only one activity in the recreation program. lt is also called Recreation and is one of two activities in the department as a whole. ln turn, the recreation activity is broken down into two subactivities. The one pertinent to our case is aquatics. Normally, a department would tend to have five to six programs with numerous program activities and subactivities, but we are presenting our fictitious department this way in order to simplify the example.
Below the sub-activity level we have sub-sub activities that produce specific outputs. The sub-sub activities we have identified are lifeguarding and instruction.
We have identified two outputs requiring costing within lifeguarding, namely lifeguarding pool sessions and the training of the public in pool safety. The output of the instruction sub-sub activity is lessons.
In the following schedules we define a simplified data base of cost figures and operational statistics that are used to display an example of cost pooling and cost allocation to sub-sub activities and outputs.

Schedule 1 : Sports and Leisure Department Base Data
Below we provide dollar values for major cost components at the various levels in the organization. These include corporate and administrative services (C&A) costs, program support, direct costs and the cost of fixed assets to be depreciated. We also provide key operating variables such as person-years, by which the costs will be allocated. These arbitrary cost figures and operational statistics are completely fictitious and have been presented in order to illustrate the processes identified in the guidelines for costing of outputs.
Salaries and Other Operating Costs	($ 000)	
Departmental C&A	3,000	
Recreation program support	600	
Life guarding sub-sub activity	4,500	
Instruction sub-sub activity	1,000	
Historical Value of Assets	($ 000)	
Recreation activity		
	(Assuming all purchased at the beginning of this year and used solely in aquatics sub-activity)	3,000	
Depreciation rate	20%	
Cost of capital	10%	
Person-Years		
Total department	600	
Recreation program/	400	
Life guarding	150	
Instruction	50	
Other sub-activity in Recreation Program	200	
Output Operation Statistics		
Lifeguarding:	number of two-hour pool sessions	100,000	
	hours of public safety training	50,000	
Instruction:	number of lessons	50,000	

Schedule 2 : Allocation of Corporate and Administrative and
Program Support Costs to Sub-Sub Activities
The following graphic shows the allocation of corporate and administrative and program support costs to sub-sub activities. For the purpose of this case study, person-years were deemed to be the most appropriate basis for the allocation of these costs. As such, C&A costs are allocated to the recreation program and subsequently to the sub-sub activities of lifeguarding and instruction based on person-years. Likewise, recreation program support costs are allocated to lifeguarding and instruction based on person-years.

Notes
(1)	400 PYs x 3,000 = 2,000	
	600	
(2)	150 PYs x 2,000 = 750	
	400	
(3)	  50 PYs x 2,000 = 250	
	400	
(4)	150 PYs x 600 = 225	
	400	
(5)	  50 PYs x 600 = 75	
	400	

Schedule 3 : Calculation of Depreciation and Cost of Capital Aquatics Activity
The following illustrates the calculation of depreciation and cost of capital for the aquatics sub-activity. Depreciation is calculated for the aquatics sub-activity by applying a hypothetical depreciation rate (20 per cent) to the historical value of assets ($3 million). In a more detailed example, separate rates would be applied to different categories of assets such as buildings and machinery and equipment. We have also calculated the cost of capital by applying an interest rate (the CRF Lending Rate - in this example, 10 per cent) to the historical net book value of assets ($3 million less one half of $600,000 = $2.7 million). Both depreciation and cost of capital have been allocated between the sub-sub activities within aquatics. In this case, we base this allocation on the subtotal of other costs, shown in Schedule 2. This is because lifeguarding and instruction use the same asset base. If they had used different assets, we would have allocated the depreciation and cost of capital based on the relative proportion of asset net book values used in each sub-activity.
1.	Depreciation ($000)
a)	Calculation
Historical cost – aquatics		3,000	
x Depreciation rate	20%	
		= 600	
b)	Allocation To sub-sub Activities Based On Subtotal of Other  Costs
Lifeguarding	5475 x 600 = 483	
	6800	
Instruction	1325 x 600 = 117	
	6800	
2.	Cost of Capital ($000)
a)	Calculation
Historical cost – (Average net book value for the year)	
3,000 - 600 = 2,700	
		2	
x Cost of capital rate		10%	
		= 270	
b)	Allocation to Sub-sub Activities Based on Sub Total of Other Costs
Lifeguarding	5475 x 270 = 217	
	6800	
Instruction	1325 x 270 =  53	
	6800	

Schedule 4 : Aquatics Sub-Activity: Accumulation of Costs by Sub-Sub Activity ($000)
Below we show an accumulation of the various cost categories by sub-sub activity. The direct, program support, and C&A costs are drawn from Schedule 2. Depreciation and cost of capital were calculated and discussed in Schedule 3. Total costs of the aquatics sub-activity, which are about $7.7 million, are comprised of roughly $6.2 million for the lifeguarding sub-sub activity and $1.5 million for the instruction sub-sub activity.
Sub-Sub Activity	Direct Costs	Program Support	
C&A	
Subtotal	
Depreciation	Cost of Capital	
Total	
Lifeguarding	4,500	225	750	5,475	483	217	6,175	
Instruction	1,000	  75	  250	1,325	117	  53	1,495	
	5,500	300	1,000	6,800	600	270	7,670	

Schedule 5 : Calculation of Total Unit Output Costs
The final step in the costing exercise is to perform a full costing of outputs. The related calculations for this illustrative case are shown below. Here we take the total costs for each sub-sub activity, drawn from Schedule 4, and apply them over the units of output identified in Schedule 1.
In the case of lifeguarding, hours were selected as the lowest common denominator to be used as the basis for allocating costs to outputs. One of the outputs is training of the public in pool safety, which can be quantitatively expressed in terms of hours of training. The other output, pool sessions, is translated into hours by multiplying the number of sessions by the hours per session. Total costs are divided by total hours to yield cost per hour. This is adjusted for the number of hours per pool session in arriving at the total cost per pool session. The cost per hour directly represents the cost per public safety training hour. In the case of instruction, lessons are the only output. Total costs are simply divided by total number of lessons to derive the cost per lesson.
1.	Lifeguarding
Total costs	= $6,175,000	
Total hours
100,000 pool sessions x 2 hours each
Hours of public safety training	
= 200,000
=   50,000
250,000	

Total cost per lifeguarding hour
Total cost per pool session ($24.70 x 2)
Total cost per hour of public safety training	=  $ 24.70
=  $ 49.40
=  $ 24.70	

2.	Instruction
Total cost	= $1,495,000	
Total number of lessons	=   50,000	
Total cost per lesson	=   $29.90