As the Department of Defense (DOD) looks toward the twenty-first century, the "budget management" mindset of managing fixed budgets must change. Fundamentally, we must alter the way we think and the way we work, and we must change the way we manage. We must connect outputs to outcomes with what it costs to achieve those outputs and recognize that future costs are a consequence of today's decisions. We must embrace a workforce culture with a vision focused on process management that connects costs with workloads. In this vision, employees are empowered to make changes, and business processes are reengineered to promote efficiency and increase effectiveness. Employees at all levels become partners in improving government. We are committed to providing increasing quality at decreasing, cost - achieving better value for each defense dollar spent. These are difficult but defining goals for every member of the DoD workforce, civilian and military.

This handbook is designed to help managers recast the way they manage DOD Support activities. It focuses on the ideas of unit cost and unit cost resourcing. These concepts are neither new nor complex, but they form the basis of sound management tools that DoD support activity managers can and should use to manage more effectively and better allocate scarce resources. The handbook, written for DoD executives and managers, provides the reader with a general familiarization of unit cost and an overview of the management challenges, opportunities and benefits of using unit cost. Executives and managers at every level should understand the principles outlined in this handbook. The handbook does not answer the many detailed questions that will naturally arise as organizations move toward using unit cost as a management tool.

Support organizations can and should provide low cost, high quality support. Historically, these activities operated without recognizing the true total cost of producing goods or services, and costs were not clearly related to the quantity of products produced. Some significant inputs to production were treated as free goods because producers did not acknowledge those costs, (e.g., equipment and military labor). The focus was on "executing the program," not on lowering the cost of doing business.

As will be discussed, the unit cost methodology identifies and reports all costs as they relate to outputs. This provides management with a view of the total cost of operations and the resultant cost per unit of output. This view encourages a new and more meaningful understanding of production processes at all management levels. It also assists managers in determining more efficient uses of the resources available to them. The producers' focus shifts from managing fixed budgets to managing processes and their consequent costs. Using unit cost principles is consistent with the implementation of the Government Performance and Results Act, changes arising from the National Performance Review, and other initiatives designed to create a government that works better and costs less.

The handbook will introduce the unit cost principles by presenting chapters on the unit cost conceptual framework and integrate this with a description of unit cost in the context of DoD financial management. Next is a discussion of the unit cost resourcing methodology, which is followed by a description of the management opportunities and challenges and the benefits unit cost provides. Lastly, there are appendices with a glossary, a sample annual operating budget, sample unit cost reports and a list of reference materials.

Managers who are expected to manage with unit cost must have a firm grasp of unit cost theory and practice, and the benefits that can be expected from using unit cost principles. Properly motivating and educating the workforce is the first step toward the future vision where we focus on process management and resources required for desired outcomes.

There is nothing new about unit cost principles. Private industry has used ideas based on unit cost principles for decades. Government performance budgeting, an idea based on unit cost, was suggested in the late 1940's. In 1969, Project PRIME 69, focused on "full cost" with the aim of using resources to attain maximum output for resources consumed. It is interesting to note that many combat activities have been managing with cost per unit measures for many years. For example, Air Force units that fly aircraft manage in terms of the "cost per flying hour," Navy activities manage and budget using the "cost per steaming hour" and Army units measure the cost per tank mile." Whatever other names there might be for these measures, they are also unit costs.

What is new are the advances in technology. Current technology enables managers to receive more useful information in a more timely and understandable manner. But, use of new information requires a change in "mindset" throughout the workforce. Transformation from the industrial age to the information age demands that we actually use this new information to manage and work more efficiently. Managers need to recognize that increased visibility of cost information can lead to better, more informed decision making. By relating total cost to outputs, producers and customers are made aware of the real cost of support. To this end, unit cost provides more meaningful information and assists managers and management teams in becoming more effective.

Unit cost was introduced DoD-wide in 1989. In fiscal year 1991, the supply management and distribution depots were the first functional areas to receive unit cost budgets. With the establishment of the Defense Business Operations Fund (DBOF) in fiscal year 1992, all DBOF businesses received unit cost budgets in fiscal year 1992. The DBOF, a revolving fund, uses unit cost principles to focus management attention on the total cost to produce a product and as the basis for full cost recovery. However, activities operating under unit cost may or may not be financed through the DBOF structure. Unit cost principles can be used as management techniques independent of an organization's funding source.

Currently, support organizations that produce identifiable and measurable units of output are considered to be best suited for operating under unit cost and unit cost resourcing. To be included under unit cost and unit cost resourcing, an organization must be able to identify and quantity its customer-driven outputs and have a system to align costs to these outputs. Support organizations tend to fit these criteria well.