Principles of cost analysis and management allocate single cost pool to users

Allocate Single Cost Pool to Users
Principles of Cost Analysis and
Management

© Dale R. Geiger 2011

1


Have you ever been here?

© Dale R. Geiger 2011

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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 2011

3

A Broad Definition of Managerial Costing
raw accounting data

managerial
costing
translation

managerially useful information
© Dale R. Geiger 2011

4


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 2011

5


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
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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

© Dale R. Geiger 2011

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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

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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

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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:

allocation
based on
cost driver

• Distributing the cost of utilities
to occupants in the same
proportion as space occupied
© Dale R. Geiger 2011

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The Mechanics of Allocation

allocation
based on
cost driver

• 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
© Dale R. Geiger 2011

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Two Allocation Methods
• Rate Method:

• Uses a computed rate per driver unit

• 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 2011

12


Reconciling the Two Methods
Rate
Method

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

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 2011

13


Reconciling the Two Methods
Rate
Method

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

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 2011

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Split the Dinner Check
Chez Paris

Carol

Fillet and Lobster
Chicken Kiev
Top Sirloin
Caesar Salad
Coffee 2 @1.00
House Wine 4 @5.00
Champagne
Ice Cream
Chocolate Cheesecake
Sampler
Soup/Salad
Aperitif

Total

35.00
15.00
20.00
9.00
2.00
20.00

24.00
4.00
6.00
10.00
8.00
7 .00

Alice

$160.00

Thank You
Bob

© Dale R. Geiger 2011

Ted

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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)

© Dale R. Geiger 2011

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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)

© Dale R. Geiger 2011

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 2011

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 2011

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Allocation Mechanics.xls
Enter the Name of the Cost Pool to be Allocated here:
dinner check

0

Enter the Total Cost of dinner check here:
$

160

Enter the Names of the Cost Objects here:
Bob

Ted

Carol

Alice

0

?

Enter the Name of the Cost Driver here:
Reset

© Dale R. Geiger 2011

eaters

0

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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 2011

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 2011

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 2011

23


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 2011

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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 2011

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