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Allocation of Fixed Costs

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Allocation of Fixed Costs

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Allocation of Fixed Costs
ACC 403 Principles of Accounting

The articles describe two different approaches:  Lean accounting and activity based costing.  Both have pros and cons and the selection of "what is best for allocating IT" likely rests with the culture and types of businesses.  I personally believe that activity-based costing, which essentially casts IT as a variable cost, making users sensitive to the requests they make of IT because every request is an incremental cost to their budget.  It also requires the IT department to be commercially viable (so users don't contract outside for their needs).  The downside is that ABC is time-consuming and takes resources (the allocation merry-go-round as Branton calls it) and if the costs are really fixed, there is no incremental costs and so you may incur added costs if users procure services externally. The purpose of the allocation is to assign shares costs to the users department. Allocating has two main roles:  Proper pricing of end product to customers and proper distribution of resources internally.  If departments do not know the cost of what they are using, they cannot decide if something has a payback and they cannot price to cover those costs.  Therefore, shared fixed costs should be Lean manufacturing mainly desires to eliminate non-value-added procedures.  So, the merry-go-round of allocating fixed costs is non-value added and so the least effort should be used to accomplish the goal.  The example given was to allocate a fixed price per day per project and not distinguish between projects.  This is simple and easy to understand so that workers can focus on other concerns, not their IT use. ABC, however, would not assign the same daily cost to each project because they might not use the same level of resources.  One project might be using the highest talent and the other just running the prior day's tape for a needed balance, something that the temporary worker hired last week can do....