Allocate Single Cost Pool to Users Principles of Cost Analysis and Management © Dale R Geiger 2011 Have you ever been here? © Dale R Geiger 2011 Terminal Learning Objective • Task: Allocate Single Cost Pool to Users • Condition: You are a cost advisor technician with access to all regulations/course handouts, 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 â Dale R Geiger 2011 A Broad Definition of Managerial Costing raw accounting data managerial costing translation managerially useful information © Dale R Geiger 2011 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 â Dale R Geiger 2011 Managerial Costing Terms cost pool raw accounting data managerial costing translation = managerially useful information © Dale R Geiger 2011 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 â Dale R Geiger 2011 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 © Dale R Geiger 2011 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 © Dale R Geiger 2011 What is Allocation? • Allocation: • A method of distribution that distributes cost pool to cost objects in the same proportion as cost driver • Example: allocation based on cost driver • Distributing the cost of utilities to occupants in the same proportion as space occupied © Dale R Geiger 2011 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% © Dale R Geiger 2011 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% © Dale R Geiger 2011 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? © Dale R Geiger 2011 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? © Dale R Geiger 2011 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? © Dale R Geiger 2011 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 © Dale R Geiger 2011 160 = $ 40 160 = $ 40 160 = $ $ 40 160 33 The Results Cost Allocation for dinner check Based on eaters $40 Bob Ted Carol Alice $30 $20 $10 Print $- Reset © Dale R Geiger 2011 34 Check on Learning • 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? © Dale R Geiger 2011 35 Cross Subsidization Is This Fair? Consumption © Dale R Geiger 2011 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 © Dale R Geiger 2011 37 Incremental Effects What Happens if Bob Spends $10 Less? 80 70 60 Decreased Amount 50 Bob’s Actual Consumption And Payment 40 30 20 10 Bob Consumes Bob Pays © Dale R Geiger 2011 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” © Dale R Geiger 2011 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 iIncentives exist to spend more? • What incentives exist to spend less? • What would you if you went to dinner with them tonight? © Dale R Geiger 2011 40 Check on Learning • Why did allocation based on number of eaters fail to reflect resource consumption? • What are the effects of incorrect allocation? • What might be a better method of allocation in the dinner check case? © Dale R Geiger 2011 41 Practical Exercises © Dale R Geiger 2011 42 ... Equals Proportion Method Number of Driver Units Used Total Number of Driver Units * Total Cost Pool Equals Number of Driver Units Used * Total Cost Pool Total Number of Driver Units © Dale R Geiger... Name of the Cost Pool to be Allocated here: dinner check Enter the Total Cost of dinner check here: $ 160 Enter the Names of the Cost Objects here: Bob Ted Carol Alice ? Enter the Name of the Cost. .. Units Used * Total Cost Pool Total Number of Driver Units © Dale R Geiger 2011 13 Reconciling the Two Methods Rate Method Total Cost Pool * Number of Driver Units Used Total Number of Driver Units