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(a) Cost management is important today in the public sector because there is a need to
manage the cost of social goods and services to deliver them as efficiently and effectively
as possible. Goods and services must be produced with as few resources as technically
feasible. In addition, it assists with decisions such as whether to subsidize, abandon or
outsource (all or some of the components) the service or product.
Functional cost analysis can be applied to cost management in the public sector through
incorporating the external value that consumers place on products functions with the
internal cost of the components of a product that provide these functions. A component
contribution to the value customers place on a product functions is used to determine its
allowable, or target, cost. The difference between a component current and allowable costs
is used to determine ways to reduce the resources consumed by a component or its
processes and as such, a component can be produced more efficiently therefore reducing
its cost to achieve its allowable cost.
Balancing the external value that users place on its goods and services with the internal
cost of producing the goods and services is critical for delivering social goods and services
in a manner that maximizes their benefits to society. Also, functional cost analysis allows
governmental administrators to evaluate both the benefits and costs of the components that
comprise social goods. It may also be used to integrate the external and internal value of
social goods and services with the political considerations needed for resource allocation
