Slides 3 3 allocate single cost pool to users

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 tool

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Allocate Single Cost Pool to Users

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Have you ever been here?

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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

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A Broad Definition of Managerial

Costing

raw accounting data

managerial costing translation

managerially useful information

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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

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Managerial Costing Terms

raw accounting data

managerial costing translation

managerially useful information

=

cost pool

method of distribution

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• Salary and benefits, supplies,

travel, etc in an airfield

operations center

• Utility bills for a garrison

cost pool

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• 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

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• 120mm tube product cost

• Morale, welfare, recreation cost

• Armor school cost

cost object

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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

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The Mechanics of Allocation

• Allocation is a basic

technique of activity based costing (ABC)

• Becoming an expert

is required but easy

• Allocation mechanics

excel spreadsheet makes it even easier

allocation

based on

cost driver

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Two Allocation Methods

• Yield same results

• Represent the same underlying algebra

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Reconciling the Two Methods

Number of Driver Units Used Total Number of Driver Units * Total Cost Pool

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Reconciling the Two Methods

Total Cost Pool Total Number of Driver Units * Number of Driver Units Used

Equals

Equals Rate

Method

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Split the Dinner Check

Thank You

Fillet and Lobster 35.00 Chicken Kiev 15.00 Top Sirloin 20.00 Caesar Salad 9.00 Coffee 2 @1.00 2.00 House Wine 4 @5.00 20.00 Champagne 24.00 Ice Cream 4.00 Chocolate Cheesecake 6.00 Sampler 10.00 Soup/Salad 8.00 Aperitif 7 00

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Identifying Key Information

• What is the cost pool?

• The dinner check of $160

• What are the cost objects?

• Bob, Carol, Ted and Alice

• What is the cost driver?

• Number of persons (or eaters)

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Enter the Names of the Cost Objects here:

Enter the Name of the Cost Driver here:

Reset

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Allocation by Rate Method

• First, calculate the driver rate:

Total cost pool Total driver units

Total driver units = 4 eaters

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• Second, multiply by driver units used by each cost object:

• Bob = 1 eater * $40/eater = $40

• Carol = 1 eater * $40/eater = $40

• Ted = 1 eater * $40/eater = $40

• Alice = 1 eater * $40/eater = $40

• What if Bob and Carol are a couple and Bob is

paying for them both?

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• Bob = 1 eater * $40/eater = $40

• Ted = 1 eater * $40/eater = $40

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• Bob = 1 eater * $40/eater = $40

• Ted = 1 eater * $40/eater = $40

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1 Determine Overhead Rate:

Total Cost ÷ Total eaters = Rate per eaters

160

$ ÷ 4 = $ 40

2 Compute Allocation: Usage by Cost Object x Rate = Allocation Bob 1 x $ 40 = $ 40

Ted 1 x $ 40 = $ 40

Carol 1 x $ 40 = $ 40

Alice 1 x $ 40 = $ 40

Total $ 160

Reset

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Allocation by Proportion Method

• First, calculate each cost object’s proportion:

Driver units used Total driver units

• Bob = 1 eater/4 eaters = 25%

• Carol = 1 eater/4 eaters = 25%

• Ted = 1 eater/4 eaters = 25%

• Alice = 1 eater/4 eaters = 25%

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• First, calculate each cost object’s proportion:

Driver units used Total driver units

• Bob = 1 eater/4 eaters = 25%

• Carol = 1 eater/4 eaters = 25%

• Ted = 1 eater/4 eaters = 25%

• Alice = 1 eater/4 eaters = 25%

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• 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

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by total cost pool

• Bob = 25% * $160 = $40

• Carol = 25% * $160 = $40

• Ted = 25% * $160 = $40

• Alice = 25% * $160 = $40

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by total cost pool

• Bob = 25% * $160 = $40

• Carol = 25% * $160 = $40

• Ted = 25% * $160 = $40

• Alice = 25% * $160 = $40

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Allocation by Proportion

1 Determine Proportion of Consumption

2 Multiply Proportion by Total Cost

Bob 25% x 160 = $ 40

Ted 25% x 160 = $ 40

Carol 25% x 160 = $ 40

Alice 25% x 160 = $ 40

Total $ 160

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Print

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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?

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Cross Subsidization

Is This Fair?

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Incremental EffectsWhat Happens if Bob Spends $10 More?

Original

Incremental Change

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Incremental EffectsWhat Happens if Bob Spends $10 Less?

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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”

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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?

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• 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

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Practical Exercises

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