Susan Byrne, the CEO of Troy Industrial Designs (TID), has called a meeting to evaluate the present method of charging the two offices at Dublin and Shannon, Ireland for the shared services of the Creative Design Group (CDG). She wants to discuss the present cost allocation system and suggest a better one.

TID is a reputable firm in the industrial design sector. It bids for design contracts from different firms. If successful, it makes prototypes based on the client’s blueprints, designs new products out of existing designs, or draws designs for a product that the client has in mind. TID charges clients a fixed figure upon completion of the job and 1 percent of sales accruing to the client every year for the first seven years, for the use of TID designs or products designed by TID.

The two offices of TID are run independently by different managers and are profit centers. Each manager assigns account executives to individual accounts. The account executives are paid a fixed salary, but a large part of their compensation is their bonus, which is based on the revenues accruing from the jobs that they manage. On receiving a job, the account executive informs Greg O’Connor, the head of CDG. They meet with the client and decide on a plan, detailing the job, expected time to complete the job, and other job-specific factors. The account executive then waits for the final design before informing and discussing the design with the client. As soon as the job for a client is finished, the account executive makes a detailed report explaining the work done, the number of designers employed for the job, the number of hours worked on it, the amount billed to the client, and any follow-up needed. Designing is a one-time job and it is not often that time is needed to follow up on the same job. Account executives are responsible for any follow-up on the jobs done by them. If the client comes back with another project, it is treated as a separate job.

TID centralized the design departments of the two offices to take advantage of the specialized knowledge of the designers. Although CDG is only five years old, it employs the best talent and uses the latest technology. This strategy has had a positive impact on customers; therefore TID has grown rapidly in the past few years. The two offices have a lot of confidence in the CDG and use it for all their design needs. The rapid growth has caused top management to rethink the cost procedures and other organizational aspects of the business.

CDG is totally responsible for the design part of the job. It only interacts with the client at the design stage; all other aspects of the job are done by the appropriate account executive. CDG works in small teams. Each team is led by a supervisor who reports to Greg on a day-to-day basis. Greg is evaluated on the excess of revenues collected from the two offices over the costs of his department. The cost charged to each office is decided prior to the design job being taken by CDG. Before the client is brought in for the discussion, the account executive and Greg decide what fees CDG will charge the office for the services. Revenues for CDG come from the pre-determined fees charged to the two offices.

Susan suggests that CDG should provide its services free of charge. Under this proposal, Greg would receive a fixed salary and a bonus based on overall firm profits (i.e., a percentage of the combined profits of the two offices). She believes that as the cost of the department is finally consolidated with those of the firm, there should be no allocation of costs for the department. Removal of the transfer price will help reduce the work of the accounts department and help streamline the accounts department to cope with the rapid growth of the firm. Susan says that the firm is committed to designing the best products, and that cost allocations really do not matter.

Will the resources of the Creative Design Group (CDG) be efficiently utilized under the new plan? Why? What are the merits and demerits of the existing plan? Is the proposed plan better than the existing one? Why?