Activity based costing for the military

Mallory Factor makes a great point about military spending in his latest Forbes article, What’s the Real Defense Budget?

The purpose of a large standing army is to provide for our national defense. But in recent years a growing percentage of that budget has been spent on activities that don’t involve traditional national defense. These include nation-building, policing foreign nations, humanitarian missions and ferrying executive- and legislative-branch leaders and their attendants around the globe. While these activities may be tangentially related to our standing in the world, they do not enhance our war-fighting capabilities; rather they relate more to the success of our foreign policy than to our national defense.

Rightly or wrongly, we give our military these various assignments because we don’t want to pay someone else to do them, and other government entities currently can’t. Yet just because our military can do these jobs doesn’t mean that it should. Indeed, these assignments shift focus away from the military’s core missions: keeping America safe and winning wars.

Right now it is difficult for Congress to determine how much money is spent on protecting the U.S. The “military” budget gives an exaggerated impression of the cost of our national defense.

The military’s nondefense activities may or may not be warranted, but their total costs must be transparent. If Congress does not consider these costs separately, traditional defense missions and essential equipment upgrades will be crowded out.

In accounting parlance, this is known as activity based costing, or evaluating your costs in a way that better lines up with the activities those costs are supporting.  The advantage to this approach is that it gives a much better way to prioritize activities and make good decisions about should and should not be cut.

So instead of trying to cut the big bucket of military spending, we can properly look at the costs generated from the multiple activities like providing defense services for other countries, or providing protection for humanitarian missions and we may have a better idea of the consequences of cutting those respective activities.

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2 thoughts on “Activity based costing for the military

  1. Pingback: Global Action April 12th | ikners.com

  2. Whether you agree that “keeping America safe and winning wars” precludes nation building, humanitarian missions and policing foreign nations or not, transparency of cost in the military is clearly a key and defining issue. Our military delivers vital services; and we, as taxpayers, have the right to know how our dollars are being spent – despite any potential (dis)agreement with where. It’s cost transparency, pure and simple, and it’s a key focus of President Barack Obama. And yes, activity-based costing (ABC) is a proven management accounting tool for uncovering that information.

    The military mission is clear… protect and defend! Scope creep or political winds often make this line (and the accompanying expenditures) blurry at best. Effectively implemented and deployed, ABC would provide every military branch with activity and/or cost object expenditures and how those costs align – or don’t – with its strategic mission.

    While ABC has been around for decades, its use by the military and other federal agencies has been limited or, in some cases, non-existent – despite its rec0mmended usage in:
    The President’s Management Agenda,
    “Managerial Cost Accounting Concepts and Standards for the Federal Government” (FASAB #4),
    Government Performance and Results Act (GPRA),
    Performance-Based Budgeting,
    Transparency in Government Act 2008, and
    GAO 1999 reporting finding.
    And the list goes on-and-on.

    If ABC is an answer to governmental cost transparency and is federally mandated, why isn’t it widely used by our agencies and military to provide key cost information? That’s really the issue when it comes to ABC costing. It’s a solution we have found difficult, if not impossible, to implement. We know that the medicine will cure the sickness, but it just tastes BAD going down. Culture is the hurdle; and Model Simplicity combined with Rapid Prototyping is the key.

    If you’d like to discuss this issue further, I have experienced with ABC modeling in the US Coast Guard and may be reached at william.c.clark@hotmail.com. This is clearly a difficult and defining issue for the military, and one with which I am deeply concerned and involved.

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