Optimization of Public Financial Management through the Application of Activity Based Costing (ABC)

Abstract

This study aims to understand public financial management, which requires a cost determination system that is accurate, transparent, and capable of supporting effective decision-making. However, traditional cost accounting (TCA) methods often create cost distortion because they rely only on simple allocation bases such as direct labor hours or production volume, making them less able to reflect the actual consumption of activities. The literature review in this research examines various findings on the implementation of Activity Based Costing (ABC) in the public sector, including local governments and international institutions. This study analyzes three scientific articles from leading databases (Google Scholar). Based on the referenced journals, the implementation of ABC has been proven to provide more accurate cost information through cost tracing based on relevant activities and cost drivers. In South Africa, ABC plays a role in improving financial management, cost control, and the quality of decisions in delivering public services. Similar findings are also shown by other studies, which confirm that ABC is able to overcome the weaknesses of traditional methods, reduce waste, and improve operational efficiency. Nevertheless, the implementation of ABC still faces various challenges such as high implementation costs, resistance to change, limited human resources, and difficulties in accurately defining cost drivers. Overall, the findings indicate that ABC has significant potential in optimizing public financial management, provided that it is supported by strong management commitment, organizational readiness, and effective implementation strategies. With proper application, public organizations can enhance cost transparency, budget efficiency, and the quality of services provided to the community