The Role of Capital Cost in Performance Measurement and Benchmarking

Abstract

T he literature on performance measurement can be segmented into three components: the theoretical application of why we should measure performance, the technical application of how to measure it, and the contextual application of how organizations actually use performance measures. The technical application of creating and tracking performance indicators has been especially useful to the promotion of performance management given the amount of research devoted to the subject. The problem is that proponents of performance measurement often neglect the issues of cost data, focusing primarily on the routine collection of performance measures (Nyhan & Martin, 1999). Governmental units are encouraged to use full-cost accounting when calculating the cost of providing a service (Gauthier, 1998). Full-cost accounting promotes the use of direct cost, indirect cost, and capital cost. Direct costs are found on an entity's general ledger for most governmental programs. Indirect costs are the proportional costs of support functions that assist programs in providing services. Capital costs are the obligations from consuming tangible assets during service delivery. These obligations may represent a direct expenditure in governmental funds or a depreciation expense in proprietary funds. They are an essential cost of service delivery and should be reflected in measures of efficiency. The North Carolina Local Government Performance Measurement Project (the project), managed by the Institute of Government at the University of North CarolinaChapel Hill, is a benchmarking initiative to encourage both internal and external comparisons of performance among local governments. The project uses a full-cost accounting model for calculating the total cost of each service area under study, including capital cost. The total cost of each service is then used to calculate the efficiency measures employed by the project. This article reviews the issues of capital cost faced by the project and why they are critical in the development of performance measures. It provides the background of the project, covers the essential elements that affect capital cost, and discusses the necessary steps of collecting and cleaning cost data. Localities create measures of efficiency