Scottish Public Finance Manual

The Scottish Public Finance Manual (SPFM) is issued by the Scottish Ministers to provide guidance on the proper handling and reporting of public funds.

Annex 2: calculating costs

1. The main features to be taken into account in measuring the annual cost of a service are listed below. Not everything in the list will apply to every service and the list may not be exhaustive. It is important that the calculation is comprehensive, including all relevant overheads and non-cash items:

  • accommodation, including capital charges for freehold properties
  • fixtures and fittings
  • maintenance, including cleaning
  • utilities
  • office equipment, including IT systems
  • postage, printing, telecommunications
  • total employment costs of those providing the service, including training
  • overheads, eg (shares of) payroll, audit, top management costs, legal services, etc
  • raw materials and stocks
  • research and development
  • taxes: VAT, council tax, stamp duty, etc
  • depreciation
  • return on capital
  • notional or actual insurance premiums
  • fees to sub-contractors
  • distribution costs, including transport
  • advertising
  • bad debts
  • provisions

but not

  • enforcement costs
  • replacement costs of items notionally insured
  • start up costs (those which can be capitalised in the accounts)

2. So far as possible the calculation should use actual costs, where they are known. For services just starting, there may be no alternative to using estimates, geared to estimated consumption patterns. Start up costs and the cost of fixed assets should be scored in resource accounts (or their equivalent) in full, attributing to the cost of the service just the depreciated value each year.

3. For services which are charged at different rates, the same procedure should be used to set the different rates. That is, the cost of any premium service should be objectively justifiable by its additional cost (eg where faster shipping is offered); or conversely any discount should be justifiable by the saving to the supplier (eg using the internet rather than over the counter). Note, however, that sometimes the legislation permits differential pricing unrelated to the relative underlying costs - though even then there should be good policy reason for the difference.

4. In calculating VAT costs it should be borne in mind that the impact of input and output VAT is quite different. The cost of providing a service is affected by input VAT e.g. if VAT charged on relevant bought in goods or services (input VAT) can be recovered then VAT should be ignored for the purposes of determining the cost of providing the service. If however input VAT cannot be recovered then it should be included in the calculation of costs. The question of whether or not VAT should be added to the charge imposed on the "customer" (output VAT) is a separate matter, and depends on the nature of the transaction. If the transaction is covered by VAT regulations then output VAT must be added. It is then up to the "customer" to determine whether they can reclaim / offset such VAT.


Page Published/ Updated: January 2008

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