In private business, this is a sensible method for minimizing total cost. But government agencies do not operate in the private sector with the same competitive pressures as private business. They often maintain excess productive capacity or overhead and allocate resources inefficiently. For this reason, public-sector estimates of the marginal cost of expansion often are unrealistically low. To assess the relative efficiencies of public and private service, the total cost or fully allocated cost of both should be compared.
Total cost is the sum of the direct and overhead cost of providing a particular service.
Costs to a target bureau often are borne by other bureaus in the same agency and not reported as a bureau expense. When determining costs, managers should be on the lookout for in-house units attempting to subsidize that part of their operation that must compete with private firms from protected parts of the unit. The best way to guard against this is to bring in an objective third party to determine the agency's true costs. Failure to Allocate Overhead. Indirect costs, or overhead, such as insurance, utilities, facilities and administration, are often shared by many bureaus within an agency.