Allocation of Computer Costs Salquist, Inc., is an international ethical pharmaceutical manufacturer that specializes in hormone research and the de- velopment and marketing of hormone-base products. The 22 different wholly owned subsidiaries and separate divisions that comprise the organization are highly decentralized, but they receive overall direction from a small corporate staff at parent-corporation headquarters in Palo Alto. The laboratories division, research division, and all corporate offices are located at the home- office site. Each of the divisional functional areas operates as a cost center. That is, labs accounting, labs production, labs sales, research accounting, and research operations are separate cost centers. Corporate purchasing, employee relations, office services, and computer (EDP) systems also function as in- dividual cost centers, and they provide their services to Research, Labs, and the other divisions as necessary.

Until recently, no costs of the corporate service cost centers were allocated to the divisional cost centers; they were simply lumped together as central corporate overhead. Recently, however, it was decided to start charging the operating units (that is, the cost centers) for their EDP usage. Prior to this time, EDP services were simply requested as desired by the cost centers;
priorities were determined by negotiations, with ultimate recourse to an EDP control committee (each cost center was represented); and all charges were absorbed as corporate overhead.
EDP systems comprise both systems programming services and computer operations. In the current “charge-back” system, the EDP director prepares a budget at the start of each quarter based upon his estimates of user demand.
Using full absorption costing, he then computes an hourly charge rate, which he promulgates to the user cost centers. The users prepare their budgets utilizing his charge rate and their estimates of the services they think they will be needing. When a user desires to undertake any specific project or use EDP services, he negotiates an agreement with EDP on the hours (thus cost)
that he will be charged. The user is free to reject the EDP “bid” and obtain outside services if he does not feel the EDP job estimates are reasonable. Also, since many projects last a year or more but service agreements are arranged on a quarterly basis, the user can drop a project: in midstream at the end of a quarter if his overall budget should become too tight. If the actual hours needed to complete a given job exceed those contracted for, the EDP center must absorb the extra cost as an unfavorable overhead variance.
The performance of all cost centers is evaluated on the basis of how closely their actual results match budget. Thus the EDP director must not only assure that his actual expenditures coincide with those that were budgeted, but that he is able to bill other centers for all his actual charges. He must be sure that he contracts for enough projects from the users to absorb his budget.
The shift to the charge-back method was imposed by the corporate financial vice-president for the “‘purpose of putting control and responsibility for expenditures where the benefits are received.” The VP also felt the move was necessary to avoid a “mushrooming of the EDP group” and to make users more aware of the costs they were incurring. An additional factor mentioned was an almost irresistible tide of “allocationism” prevalent in local industry because of the overpowering influence of government contracting there. He does feel he will resist allocating the other services, however, with the possible exception of printing and reproduction, which has grown to be quite costly in the last few years. The major rationale for not allocating the other services is that they are all uniform, predictable functions, whereas the EDP services are more spasmodic and project-oriented.
The head of the EDP group is strongly opposed to the new system. He believes that there is “too much lip service paid to the specialized nature of computers” and that the new system is reducing the effectiveness of the EDP group to the corporation as a whole. He and several of the user-directors believe the shift was simply a political maneuver on the part of the VP to consolidate the EDP empire under the aegis of the corporate staff. The head of the EDP group believes a nonchargeable system administered by the EDP control committee would yield better results.
. What are the motivational and operational effects of this change on users, EDP group, and corporation?
Evaluate the impact of having coexistence of allocated and nonallocated Services.
3. Evaluate the operation of this particular allocation system. lop2