1. Management Accounting (Costing) and Tariff Setting
mSCOA /Budget Workshop
9-11 November 2016

3. Management Accounting
Management Accounting - Industrial revolution
Production cost per unit
Management activities
Costs - Direct and indirect
Trading services
Tariff calculation
Costing methodology - ABC
Internal billing
Departmental charges
Prerequisites - Policy
Base cost and Formulas
Planning, Directing, Motivating, Controlling, Communication (internally)

4. PSD Costing Segment 1 of 3 Costing Segment
The Costing Segment provides for the classification of indirect (secondary) costs that do not directly attribute to the output and are sometimes referred to as activity based recoveries, for example labour, vehicle, plant and equipment, internal service charges (internal billings), and departmental charges for example office rental, audit fees and procurement.
The purpose for including this segment in SCOA is to provide for the recording of “full cost reflection” for at least the four core municipal functions being electricity, water, waste water and waste management services - as a minimum requirement. Focusing on these functions is essential for setting cost reflective tariffs as these four services are the most significant revenue generating functions within municipalities.

5. PSD Costing Segment 2 of 3
Extracting information from multiple segments within SCOA would thus provide “full cost” information for the defined core municipal functions. Typical the Function Segment would identify the core service as being electric, water, waste water management and waste management. The Item Segment will provide the direct (primary) cost whilst the Costing Segment ads the indirect (secondary cost) dimension.
“Indirect costs” (secondary cost) is initially recorded as “primary cost” within the Item Segment and funded according to the indicator selected in the Fund Segment. The “costing indicator” within the Funding Segment provides for the re-distribution of these primary costs between functions (no change in the funding source), together with indicators provided in the Cost Segment. The Project Segment provides the classification link for these indicators and specific projects.

6. PSD Costing Segment 3 of 3
The high-level classification provided for in this segment and the definitions thereof are:
Activity Based Recoveries - This refers to the actual allocation of resources utilised by various departments, for example allocation of labour are based on time sheets, and the allocation of vehicles and plant equipment are based on log sheets. A charge out rate has to be determined according to the policy.
Internal Billing – This refers to departmental use of internal services such as electricity, water, waste water management and waste management. In illustrating, the cost allocation for the electricity department’s water consumption or alternatively the electricity consumed during water purification. Departments. are billed according to consumption
Department Charges (Support Services) - This refers to the allocation of overheads to cost centres for example information technology used by multiple functions. Distribution of costs on a pro rata allocation based on number of service points or users within the electricity department. Some financial applications refer to assessment charges.

7. Practical examples
XYZ municipality’s electricity department shares the building with the water distribution department. The rent is paid and allocated to the financial department. The water distribution department also shared the pool vehicle that was allocated to the electricity department but kept a log book.
The municipality paid rent of R excl vat. It was established that the Water Management department only occupies 25% of the building and the pro- rata approach will be used to apportion the rent using the costing segment.
As per the log book, a total of 30 000 km was travelled by the pool car. It was further established that the Water Management department used km. Use the costing system to allocate the vehicle cost to the water section taking into consideration the following costs:
Depreciation – R 40 000
Maintenance- R 15 000
Fuel- R 9000
3. The electricity department also issues a bill to the finance department for electricity services to the value of R16 000. Use the costing system to charge this service to the finance department.

8. Practical examples Solution 1
The rent ( R16000) is split by percentage:
Water Distribution: 25% - R 4 000
Electricity: 75% - R
Solution 2:
Cost Pool = =
Cost driver = cost/total mileage = / KM = R1.80 per KM
Cost to Water distribution: = x R1.80 = R
Solution 3
Electricity Cost billed to Water distribution= R

9. Practical examples Solution 1 SEGMENT FINANCE ELECTRICITY WATER DIST
PROJECT
DEFAULT
FUNCTION
FINANCE & ADMIN: CORE FUNCTION: FINANCE
ENERGY SOURCES: CORE: ELECTRICITY
WATER MANAG. : CORE: WATER DISTRIBUTION
FUND
NON FUNDING
ITEM
COSTING
RECOVERIES: DEPARTMENTAL: OFFICE RENTALS
CHARGES: DEPARTMENTAL: OFFICE RENTALS
REGIONAL
MSC
FINANCE DEPT.
TECH. SERVICES
AMOUNT
- R R R

10. Practical examples Solution 2 SEGMENT ELECTRICITY WATER DIST PROJECT
DEFAULT
FUNCTION
ENERGY SOURCES: CORE: ELECTRICITY
WATER MANAG. : CORE: WATER DISTRIBUTION
FUND
NON FUNDING
ITEM
COSTING
RECOVERIES: ABC: VEHICLES: OPERATING
CHARGES: ABC: VEHICLES: OPERATING
REGIONAL
MSC
AMOUNT
- R R

11. Practical examples Solution 3 SEGMENT ELECTRICITY WATER DIST PROJECT
DEFAULT
FUNCTION
ENERGY SOURCES: CORE: ELECTRICITY
WATER MANAG. : CORE: WATER DISTRIBUTION
FUND
NON FUNDING
ITEM
COSTING
RECOVERIES: INTERNAL BILLIN ELECT. CONSUMPTION
CHARGES: INTERNAL BILLIN ELECT. CONSUMPTION
REGIONAL
MSC
AMOUNT
- R R

12. Costing Segment: Tariff Setting

13. Need for Cost Accounting (Cost Reflective Tariffs)
By only inflation adjusting tariffs there is no real growth in income
Increased real growth in income is essential to:
Improve and sustain service delivery levels
Fund repairs and maintenance and renewal of infrastructure.
Assists to realise the full revenue potential of the municipality
Ensures that tariff services are adequately funded over the long term, resulting in an efficient, sustainable and reliable service
Full cost recovery is the process of gathering and reporting information about the true cost (direct plus indirect costs) of providing a service by tracking and accumulating the total cost of the process to provide the service
Planning to recover the full cost of services (cost-reflective tariffs) is a structured, transparent methodology of setting tariffs that is designed to take both financial sustainability and affordability into consideration
Imperative that the full cost of rendering a particular service is known so that tariff decisions are taken with full knowledge of the cross-subsidy that will be required and provided from other revenue sources
Improved budgeting - Understanding demand and how costs are reflective of demand for a services allows municipalities to budget better
Transparency - Citizens need to understand the cost drivers and how tariffs are calculated
Municipalities that apply full cost recovery are in general very efficient and provide a high level of service, contributing to customer satisfaction and thereby encouraging payment for services, resulting in investment for replacement and expansion of services.

14. Benefits of Implementing Cost Accounting – (Cost Reflective Tariffs)
Provides a better understanding and consistent approach across municipalities with regard to the principles and techniques of cost allocation, and ability to benchmark costs against municipalities of a similar size
Provides accurate and complete information on the real cost of managing a tariff service:
Increase the accuracy of cost information by identifying secondary costs and assigning it to specific municipal services
Asist with resource allocation for a particular service
Provide a basis for tariff setting to implement full cost recovery on tariff services
Ensures that those who are using the services are paying the full cost of the service
Provides transparency with regard to cross-subsidisation between consumer groups
Managers will have a better understanding of their costs and will be able to predict future costs more precisely
Promotes allocation of internal resources, ensuring that available resources are utilised optimally, and duplication of services can be identified
Identification of and making informed decisions about potential inefficiencies and cost savings, as well as the types and levels of services provided
Ensures correct pricing of services (and will result in consumers not abusing scarce resources)

15. Risks of Not Implementing Full Cost Recovery
Inability to finance network expansions, or properly maintain existing infrastructure resulting in low service levels, which in turn will have a negative effect on the willingness of customers to pay
Low levels of cost recovery from the user will result in insufficient income for the effective and efficient operation and management of the service
Inability to further invest in the service, which can result in a possible loss of scarce resources such as water if the infrastructure is not maintained properly
Potential for cross-subsidisation from property rates or other services
A widening gap between full cost and current expenditure will result in huge tariff increases when rectified
No transparency around tariff determination
An increase in emergency repairs against scheduled or preventative maintenance
An increased risk of more service outages, as preventative maintenance is not being done, with the accompanying inconvenience for customers and loss of revenue for the municipality
A steady degradation of system infrastructure, resulting in a reduction of service level standards.
Reduced ability to attract new business
Can result in higher insurance costs, a lower credit rating and higher lending costs

16. Illustration of Cost Reflective Tariff

17. Need to get full cost of services.

18. Municpal Revenue

19. 2016/17 Medium Term Revenue & Expenditure Framework
A Schedule- Table A10
CPT Cape Town - Table A10 Basic service delivery measurement
Description
2016/17 Medium Term Revenue & Expenditure Framework
Budget Year 2016/17
Budget Year /18
Budget Year /19
Total number of households
975,507
995,017
1,014,917
Households receiving Free Basic Service
Water (6 kilolitres per household per month)
222,098
Sanitation (free minimum level service)
Electricity/other energy (50kwh per household per month)
231,645
232,545
233,445
Refuse (removed at least once a week)
302,957
310,534
318,278
Cost of Free Basic Services provided - Formal Settlements (R'000)
Water (6 kilolitres per indigent household per month)
212,041
235,366
261,256
Sanitation (free sanitation service to indigent households)
143,728
159,538
177,087
Electricity/other energy (50kwh per indigent household per month)
189,657
203,998
219,436
Refuse (removed once a week for indigent households)
235,401
248,348
262,007
Cost of Free Basic Services provided - Informal Formal Settlements (R'000)
671,529
737,533
802,443
Total cost of FBS provided
1,452,356
1,584,783
1,722,229
Highest level of free service provided per household
Water (kilolitres per household per month) 6
Sanitation (kilolitres per household per month) 4
Sanitation (Rand per household per month)
102
107
119
Electricity (kwh per household per month) 60
Refuse (average litres per week)
240
Revenue cost of subsidised services provided (R'000)
Property rates (tariff adjustment) ( impermissable values per section 17 of MPRA)
76,186
80,986
85,910
Property rates exemptions, reductions and rebates and impermissable values in excess of section 17 of MPRA)
1,247,403
1,325,989
1,406,609
Water (in excess of 6 kilolitres per indigent household per month)
159,031
176,524
195,942
Sanitation (in excess of free sanitation service to indigent households)
107,796
119,653
132,815
Electricity/other energy (in excess of 50 kwh per indigent household per month) –
Refuse (in excess of one removal a week for indigent households)
Municipal Housing - rental rebates
22,955
24,218
25,550
Total revenue cost of subsidised services provided
1,613,371
1,727,371
1,846,826

20. References and Acknowledgements
Project Summary document

21. Thank you