1. Allocate Single Cost Pool to Users © Dale R. Geiger 20111

2. Have you ever been here? 2© Dale R. Geiger 2011

3. 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 © Dale R. Geiger 20113

4. A Broad Definition of Managerial Costing raw accounting data managerial costing translation managerially useful information © Dale R. Geiger 20114

5. 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 © Dale R. Geiger 20115

6. Managerial Costing Terms raw accounting data managerial costing translation managerially useful information = cost pool method of distribution cost object © Dale R. Geiger 20116

7. Terminology Cost pool: Cost pool: An aggregation of incurred or source costs to be distributed Examples: Salary and benefits, supplies, travel, etc. in an airfield operations center Utility bills for a garrison cost pool © Dale R. Geiger 20117

8. Terminology Method of distribution: 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 © Dale R. Geiger 20118

9. Terminology Cost Object: Cost Object: A view of cost needed by management Examples: 120mm tube product cost Morale, welfare, recreation cost Armor school cost cost object © Dale R. Geiger 20119

10. What is Allocation? 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 © Dale R. Geiger 201110

11. 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 © Dale R. Geiger 201111

12. Two Allocation Methods Rate Method: Rate Method: Uses a computed rate per driver unit Proportion Method: Proportion Method: Computes a proportional share of the total cost based on driver usage Both Methods Yield same results Represent the same underlying algebra © Dale R. Geiger 201112

13. Reconciling the Two Methods Number of Driver Units Used Total Number of Driver Units * Total Cost Pool Equals Proportion Method © Dale R. Geiger 201113

14. Reconciling the Two Methods Total Cost Pool Total Number of Driver Units * Number of Driver Units Used Equals Rate Method © Dale R. Geiger 201114

15. 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 Total $160.00 Chez Paris Bob Carol Ted Alice © Dale R. Geiger 201115

16. 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) © Dale R. Geiger 201116

17. 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) © Dale R. Geiger 201117

18. 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) © Dale R. Geiger 201118

19. 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) © Dale R. Geiger 201119

20. Allocation Mechanics.xls © Dale R. Geiger 201120

21. Allocation by Rate Method First, calculate the driver rate: Total cost pool Total driver units Cost pool = $160 Total driver units = 4 eaters Rate = $40/eater © Dale R. Geiger 201121

22. Allocation by Rate Method First, calculate the driver rate: Total cost pool Total driver units Cost pool = $160 Total driver units = 4 eaters Rate = $40/eater © Dale R. Geiger 201122

23. Allocation by Rate Method First, calculate the driver rate: Total cost pool Total driver units Cost pool = $160 Total driver units = 4 eaters Rate = $40/eater © Dale R. Geiger 201123

24. Allocation by Rate Method 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? © Dale R. Geiger 201124

25. Allocation by Rate Method 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? © Dale R. Geiger 201125

26. Allocation by Rate Method 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? © Dale R. Geiger 201126

27. Allocation by Rate Method © Dale R. Geiger 201127

28. 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% © Dale R. Geiger 201128

29. 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% © Dale R. Geiger 201129

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 201130

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 201131

32. 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 201132

33. Allocation by Proportion © Dale R. Geiger 2011 33

34. The Results © Dale R. Geiger 2011 34

35. 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 201135

36. Cross Subsidization Consumption Cost allocation Is This Fair? Consumption Cost allocation © Dale R. Geiger 2011 36

37. Incremental Effects What Happens if Bob Spends $10 More? Original Incremental Change 0 10 20 30 40 50 60 70 80 90 Bob ConsumesBob Pays © Dale R. Geiger 201137

38. Incremental Effects What Happens if Bob Spends $10 Less? 0 10 20 30 40 50 60 70 80 Bob ConsumesBob Pays Decreased Amount Bob’s Actual Consumption And Payment © Dale R. Geiger 201138

39. 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 201139

40. 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 do if you went to dinner with them tonight? © Dale R. Geiger 201140

41. 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 201141 Check on Learning

42. Practical Exercises © Dale R. Geiger 201142