IntroductionThe city of Indianapolis wants to privatize its municipal services. Preceding the privatization process, the government wishes to determine the prevailing cost of performing these services with its employees. The present financial system has no relevant information about the cost of what the municipal workers did and has no means to measure how effectively a certain job was performed. The city forms a team to study the cost of filling potholes and develops Activity Based Costing (ABC) system. It displays the ABC cost estimates to the union and enable the workers to initiate new cost-saving procedures so they can compete and face bidding with private sectors. This case study outlines how the ABC model is developed and how does it benefit the city workers with the information received from the new cost system.Reason for Privatizing the services:Government should perform a cost analysis before privatizing government services, this is because cost analysis will provide government with cost information for them to accurately price the bid for privatization. It is easier to know what to expect if they get cost of the services they want to outsource. This will also bring to light the benefit and justification of outsourcing some government functions to private companies. Especially if they found out they are expanding more in the process than the bid they got from private companies. The taxpayers will also know how much government services cost, like filling potholes etc.In the case of Indianapolis, their financial system record does not have information about the services provided by the municipal worker. However, using proper cost analysis method like activity-based estimates gave the municipal worker adequate information about the cost of their activities. Also in doing the cost analysis, they could submit their own bid with private companies; with that, they will know if they are competitive with the private companies. In addition, this will give the workers opportunity to improve their performance. With proper cost analysis, they could look at a specific service and know how much each activity will cost and thereby look at ways to eliminate certain cost or at least reduce cost.Development of ABC modelThe newly formed project team focuses on a service that is easily understood and is important to every citizen.The study for ABC model was scheduled during pothole repair contract. The following strengths and weaknesses are based on ABC analysis while carrying out work on pothole repair contract. The strengths of ABC analysis in this project are as follows:Decrease in investment: with ABC analysis, cost drivers which are of high value can be lowered as much as possible. This will also help in reducing the investment in materials used for a specified job.For example: putting a ton of asphalt in potholes is a cost object for studying cost of filling potholes.Strict control: Tight control can be exercised on the cost drivers that have highest value.For example: The cost of carrying multiple tasks with the same resources, such as patching crew was waiting for the asphalt to be picked up and delivered to the pothole, the crew had been used for doing other jobs, like sweeping a bridge or picking up limbs. Economy: ABC analysis is economic as it gives detailed information on cost required to do a specific work with low value.For Example: Removing 50% of the supervisors and changing the crew assignments for filling potholes, from eight down to four or six and improving efficiencies in the use and assignment of equipment which lead to cost reduction.The weaknesses of ABC analysis in this project are as follows:This method can’t be efficient if the cost drivers are not assigned into the groups appropriately for instance, the team initially faced difficulty in defining outputs for some activities for example, filling potholes, fixed asset and indirect support costs to pothole filling.ABC analysis doesn’t have standard classification for cost driver grouping, which makes it difficult to assign materials or cost drivers.Difficulty in implementing change in larger organizations. The team had to convince union to incorporate all the actions needed to lower cost such as removing supervisors, managers…etc. The government sector had no relevant data and costing system to check what employees did, what was the cost incurred in doing their task and how efficient their task was. For instance, the pothole-filling team had not been aware of the number of take-home vehicles allocated to them, their annual supplies budget, and their costs for rent and maintenance of both their facilities and their vehicles. Before attempting to privatize the municipal services, it is recommended that the city managers should have allowed the Subject Matter Experts of municipal department to view the ABC estimates to help them understand the costing involved in doing a certain job. It would have made them aware of the cost, and given them a chance to make efforts to improve it. They would also deal with a bid process based on ABC costing so that both the municipal employees and the private firms would be convinced that ABC costing was justifiable.So when there is any huge conversion or system in place,there has to be proper analysis and development. In this case, the Mayor did very deep investigation about what were the faults,how to change them,implementation of ABC model and everything worked out well. However,the huge implementation took a lot of time and was very complex implementation.It involved taking hard decisions like firing half of the supervisor and the costs to upgrade the equipment was an extra overhead.