Slides 3 3 allocate single cost pool to users

Allocate Single Cost Pool to Users Have you ever been here? Terminal Learning Objective • Task: Allocate Single Cost Pool to Users • Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: with at least 80% accuracy • Explain how poor cost information encourages undesired behaviors • Calculate driver rate • Calculate proportion A Broad Definition of Managerial Costing raw accounting data managerial costing translation managerially useful information Why Is This Translation Needed? • Accounting Systems usually measure input or source costs • Labor, overhead, materials • Salaries, benefits, supplies, contracts • Managers want measurements based on output or consumption • Product, service, project • Consuming organization, customer Managerial Costing Terms cost pool raw accounting data managerial costing translation managerially useful information = method of distribution cost cost object object Terminology • Cost pool: • An aggregation of incurred or source costs to be distributed cost pool • Examples: • Salary and benefits, supplies, travel, etc in an airfield operations center • Utility bills for a garrison Terminology • Method of distribution: • The mechanics of deriving management information from the cost pool • Example: • Determine unit cost by adding all input costs and dividing by number of units method of distribution Terminology • Cost Object: • A view of cost needed by management • Examples: • 120mm tube product cost • Morale, welfare, recreation cost • Armor school cost cost cost object object What is Allocation? • Allocation: • A method of distribution that distributes cost pool to cost objects in the same proportion as cost driver • Example: • Distributing the cost of utilities to occupants in the same proportion as space occupied allocation based on cost driver 10 Allocation by Proportion Method • First, calculate each cost object’s proportion: Driver units used Total driver units • • • • Bob Carol Ted Alice = eater/4 eaters = 25% = eater/4 eaters = 25% = eater/4 eaters = 25% = eater/4 eaters = 25% 28 Allocation by Proportion Method • First, calculate each cost object’s proportion: Driver units used Total driver units • • • • Bob Carol Ted Alice = eater/4 eaters = 25% = eater/4 eaters = 25% = eater/4 eaters = 25% = eater/4 eaters = 25% 29 Allocation by Proportion Method • Second, multiply each cost object’s proportion by total cost pool • • • • • Bob = 25% * $160 = $40 Carol = 25% * $160 = $40 Ted = 25% * $160 = $40 Alice = 25% * $160 = $40 What if Bob and Carol are a couple and Bob is paying for them both? 30 Allocation by Proportion Method • Second, multiply each cost object’s proportion by total cost pool • • • • • Bob = 25% * $160 = $40 Carol = 25% * $160 = $40 Ted = 25% * $160 = $40 Alice = 25% * $160 = $40 What if Bob and Carol are a couple and Bob is paying for them both? 31 Allocation by Proportion Method • Second, multiply each cost object’s proportion by total cost pool • • • • • Bob = 25% * $160 = $40 Carol = 25% * $160 = $40 Ted = 25% * $160 = $40 Alice = 25% * $160 = $40 What if Bob and Carol are a couple and Bob is paying for them both? 32 Allocation by Proportion Determine Proportion of Consumption Usage by Cost Object Total eaters ÷ Bob ÷ Ted ÷ Carol ÷ Alice ÷ = % = 25% = 25% = 25% = 25% 100% = = Allocation $ 40 Total Multiply Proportion by Total Cost Cost Object % Bob x 25% Ted 25% Carol 25% Alice Total 25% x x x x Total dinner check 160 160 = $ 40 160 = $ 40 160 = $ $ 40 160 33 The Results Cost Allocation for dinner check Based on eaters $40 $30 $20 $10 $- Bob Ted Carol Alice Print Reset 34 Learning Check • What is the rate per hour when the cost pool totals $30,000 and the total hours are 500? • One of the cost objects uses 50 hours or resources from the cost pool described above What is its proportion? 35 Cross Subsidization Is This Fair? Consumption Cost allocation 36 Incremental Effects What Happens if Bob Spends $10 More? 90 80 70 60 Original 50 40 Incremental Change 30 20 10 Bob Consumes Bob Pays 37 Incremental Effects What Happens if Bob Spends $10 Less? 80 70 60 Incremental Savings 50 40 Decreased Amount 30 20 10 Bob Consumes Bob Pays 38 Allocation: a Zero-Sum Game • The Total is Constant • Changing Allocation Basis Simply Redistributes Cost • Increased Allocation for One Cost Object • Decreases the Allocation for Other Cost Objects • Sometimes Called “Balloon Squeezing” or “Peanut Butter Effect” 39 Measurement Effects Motivation • Managerial Costing Inevitably Impacts Behavior • Design of Managerial Costing Systems Must Recognize and Anticipate This Effect • Consider in this Example • What Incentives Exist to Spend More? • What Incentives Exist to Spend Less? • What Would You Do if You Went to Dinner with Them Tonight? 40 Conclusion • Allocation Based on Number of Eaters Failed to Reflect Resource Consumption • Results: • Unfair Cross-Subsidizations • The Creation of Almost Free Incremental Goods • Dysfunctional Behavioral Motivation • Detailed Record Keeping May be Best in This Problem i.e Separate Checks 41 Practical Exercises 42 ... rate: Total cost pool Total driver units Cost pool = Total driver units = $160 eaters Rate = $40/eater 21 Allocation by Rate Method • First, calculate the driver rate: Total cost pool Total driver... driver units Cost pool = Total driver units = $160 eaters Rate = $40/eater 22 Allocation by Rate Method • First, calculate the driver rate: Total cost pool Total driver units Cost pool = Total driver... Learning Objective • Task: Allocate Single Cost Pool to Users • Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of