Section D: Costing
Allocating costs in prison industries can be difficult because many costs overlap with other aspects of prison management. For example, a staff member in an industry may fulfil both a custodial and an instructional role. Similar costing issues exist in private sector industries. Ideally only marginal employment related staff costs should be allocated to inmate employment. But for administrative simplicity the aim is to recover all staff costs directly related to the employment activity.
A number of overhead costs that are incurred within a prison system are not directly related to employment initiatives but may be more related to other aspects of custodial management. Such overhead costs should be excluded when the rate of return on inmate employment activities is calculated.
To meet management requirements, and for transparency, it is important to record all the costs that are directly allocated to an industry.
Appropriate management, internal control, accounting and reporting procedures will be followed, and an annual consolidated income and expenditure statement will be produced for each employment initiative.
For commercial industries cost items should include:
- materials (including wastage)
- salaries (supervisors)
- inmate incentive allowances
- building rental
- repairs and maintenance
- capital charge
- contribution to overhead.
For domestic self-sufficiency activities, costing should be on a fully costed basis taking into account those costs that are directly related to the activity.
For work activity not undertaken for a financial return but for community service (eg, maintaining parks for a local community) costing should take into account all direct or marginal direct costs so that a cost comparison for different industry and employment training activities can be made.
13. Income Tax and ACC
Incentive payments to inmates are not classed as "salary" or "wages" from employment as defined in the Income Tax Act 1994. Therefore, PAYE and ACC levies are not to be deducted. However, the payment is still considered to be "income" to the inmates, pursuant to section BB 4 of the Income Tax Act 1994. Therefore, it must be declared if an inmate's total earnings require them to provide an income tax return.
In its simplest form, pricing for commercial industries and self-sufficiency activities should be based on a competitive market-related price. Industry managers need to maintain an awareness of price trends in similar external industries. However, they will also need to use commercial marketing and pricing practices in responding to specific markets. For self-sufficiency industries, products should be sold to other corrective institutions at a market price based on their competitive quality product, rather than as a required purchase. For community service industries, pricing should be on the basis of recovery of marginal direct costs.
In setting prices both at the initial evaluation phase of an industry and during the ongoing operation, the underlying direct costs have to be taken into account; otherwise the industry may suffer an ongoing loss and will not be sustainable.
In the start-up phase full cost recovery may not be achieved in every industry, but it is expected that each new commercial industry will generate a positive gross margin over time. There are costs inherent in prison industries that are not faced by the private sector. These can include higher training and supervision costs that may affect the timing and method of achieving full cost recovery.
There are two major elements of financing, namely capital finance and operating finance. Capital finance is used for the purchase or construction of physical assets and plant. Operating finance provides for the payment of the ongoing costs in an industry.
An annual business plan will be prepared for the Inmate Employment activity. This plan will be sent to the key stakeholders through the Inmate Employment Advisory Committee.
A schedule of new investments will be distributed periodically to Treasury. Detailed investment analysis will be provided to Treasury where the annual capital investment or the annual operating expenditure exceeds $100,000.
As in most industry settings, internal capital for inmate employment will be a scarce resource subject to competition. An annual allocation of internal capital finance will be made in the Department's budget. Capital finance for new industries will be allocated on the basis of a business plan, which addresses both inmate employment and training issues. As mentioned earlier, an objective remains to encourage private sector investment in assets and consequently reduce the capital costs and risks to the Crown.
To ensure the maintenance and development of Inmate Employment training, the income from prison industries needs to be available to meet costs and to provide for growth. It is intended that the income should be retained for this purpose.
The payment of incentive allowances to working inmates will be met from operating finance (including the amount already provided). No allocation of operating finance will be made from general departmental funds. Rather, prison industries will need to become self-sufficient in meeting operating costs.
16. Income Allocation
All commercial employment initiatives are expected to cover their own costs and generate a margin. This margin will be applied so as to provide a resource for prisons to further develop prison industries and to provide income for national Inmate Employment Training objectives. The exception is community service activities, which should seek to cover only marginal direct costs.
The Corrland Inmate Employment Group will be responsible for ensuring consultation with interested parties before any new commercial industries are established. Where appropriate, relevant business and labour representative groups, and government agencies, will be involved. For privately managed prisons this responsibility rests with the Superintendent.
The more significant the new industry the more likely it is that consultation will be necessary. For major capital investments the issue of consultation will be part of the Inmate Employment Advisory Committee's consideration of the proposal.
There may be situations where local consultation is not required, such as where a new industry is involved in import substitution or where local private sector cooperation has already been obtained.