Public managers recognize the implementation of an activity based cost allocation plan as a powerful tool in understanding the full costs of services. In an effort to control costs effectively, a cost allocation plan can be used as support for:

Increasing revenues by incorporating overhead costs for specific applications or charges against selected programs.

Applying the full costs of services in developing charges for fee related services, including central service costs in billing to internal service, enterprise and special revenue funds for inclusion in costs to end-users.

Making educated decisions regarding strategic planning issues, such as whether or not to cut the cost of operations or to privatize a service.

In simplistic terms, the mechanics of an activity based cost allocation plan move costs from central service or support departments to grantee or user departments. Each central services department is analyzed to determine services rendered and the beneficiaries of those services. Costs are then moved to the user departments by establishing an appropriate method or basis of allocation in a double step-down process.

The diagram below illustrates the effectiveness of adopting an activity based cost allocation plan.
The General Fund costs were reduced by approximately 17% by applying overhead costs to services outside the General Fund.