Cost Allocation Method

Topics: Cost accounting, Costs Pages: 6 (1608 words) Published: February 16, 2010
Cost allocation is a method to determine the cost of services provided to users of that service. It does not determine the price of the service, but rather determines what the service costs to provide. It is important to determine the cost allocation of the services, in order to determine a justifiable fee/charge/tax for those services.

Included in cost allocation are direct, indirect, and incremental costs. Direct costs, or separable costs, are costs that are related to a single type of service and are related to one type of output or user such as, a sector-to-sector hand-off. Indirect costs, or common costs, are related to more than one type of service, such as, the physical en-route facility. Incremental costs change with the level of output produced. Incremental costs measure changes in output, e.g., differences in staffing levels or staffing costs at a facility that is based on traffic count.

Cost allocation is a factor that determines the cost of an activity. Cost drivers are analyzed as part of activity based costing and can be used in continuous improvement programs. They are usually assessed together as multiple drivers rather than singly. There are two main types of cost driver: the first is a resource driver, which refers to the contribution of the quantity of resources used to the cost of an activity; the second is an activity driver, which refers to the costs incurred by the activities required to complete a particular task or project.

We will answer the following questions from three different organizations:1)U.S. Army Corp of Engineer: Why does the US Army Corp of Engineers worry about cost allocations? Aren't they a branch of the US Federal Government? Why does it matter whether or not costs are allocated?A)The reason U.S. Army Corp of Engineer conduct a Cost Allocation is to study a variety of possible approaches that could be used to distribute costs of the proposed alternatives. The primary purpose of allocating project costs is to identify repayment responsibility regarding cost recovery, cost sharing, or both. The Corps of Engineer used the approaches utilizing preliminary construction costs and the unrecovered Federal investment.

B)The U.S. Army Corp of Engineer is required to cost allocate funds for future projects that federal government will fund and it will be mitigate or by private sector. In another terms, after the federal government funds the projects and the mayor investor industries that do benefits from them will be responsible to repay that debt. In the case of U.S. Army Corps of Engineer, Walla Walla District, The Bonneville Power Administration is the responsible industry to re-pay the debt to the federal government.

2)The City of Seattle reading lists a series of costs and associated cost drivers for allocating these costs. Do you agree with the cost drivers (cost allocation factors)? Do you agree with the cost drivers (cost allocation factors)? Does it make sense to have all of these individual costs and drivers identified or should there be a more uniform method of allocating costs? Why do they allocate costs anyway in a government (City Government) setting -- aren't cost allocation methods mostly for manufacturing companies?A)Do you agree with the cost drivers (cost allocation factors)? Yes, I do agree with the costs drivers, it is obvious that many State Department has many sub-departments. Therefore, it is necessary to re-distribute cost and allocate cost base on historical cost and any other circumstances necessary for any additional cost projected for the new fiscal year.

B)Do you agree with the cost drivers (cost allocation factors)? Does it make sense to have all of these individual costs and drivers identified or should there be a more uniform method of allocating costs? To my understanding, the drivers selected, came from the sub-division of every State Departments. It is necessary to hold every Department and sub-department accountable for respective...

References: Department of Human Health Service web site, retrieved from: http://eclkc.ohs.acf.hhs.gov/hslc/Program%20Design%20and%20Management/Fiscal/Narrative%20Discussions/Cost%20Allocation.htm, on November 28, 2009.
Department of Human Health Service web site, retrieved from: http://www.hhs.gov/opa/espanol/grants/toolsdocs/45cfr74.pdf, on November 28, 2009.
White House web site, retrieved from: http://www.whitehouse.gov/omb/rewrite/circulars/a122/a122.html, on November 28, 2009.
White House web site, retrieved from:http://www.whitehouse.gov/omb/rewrite/circulars/a021/a021.html, on November 28, 2009.
US Army Corps of Engineers - Walla Walla Project retrieved from: http://www.nww.usace.army.mil/lsr/reports/misc_reports/allocate.htm, on November 22, 2009.
City of Seattle Budget for 2009 - 2010 retrieved from: http://www.cityofseattle.net/financedepartment/0910adoptedbudget/Cost_Allocation_2009_Adopted_and_2010_Endorsed_Budget.pdf, on November 22, 2009.
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