On page 180 of the text there is a very simple personal example of three roommates who set up cost allocation. The allocation was for rent, TV, internet and groceries. The the cost allocation system was using the three roommates as equals so the cost allocation was the total cost divided by three. That method worked our for a short period of time then each roommate found specific reasons why that cost allocation system did not work "fairly". One example was: "well since I now am really focused on school work I don't watch TV, so I should not have to pay for the cable TV".
Although this is a simple personal example, it does highlight how with any cost allocation system there can be and usually are issues. For your post, provide either a personal or professional example of a cost allocation. Then, with that cost allocation, identify any issues that you were aware of with that methodology.
180 CHAPTER 4 Why and How do Companies Refine Their Cost Allocation Systems? Organizations from Dell to Carolina Power and Light to the U.S. Marine Corps use refines cost allocation systems. Why? Because simple cost allocation systems don't always drink Good job of matching the cost of overhead resources with the products that consume day resources, The following example illustrates why. Simple Cost Allocation Systems Can Lead to Cost Distortion David, Matt, and Mare are three college friends who share an apartment. They agree to split the following monthly costs equally: Rent and utilities...... 3570 Cable TV... High-speed internet aro Groceries.... 240 Total monthly costs.....- Each roommate's share is $300 ($900/3). Things go smoothly for the first few months. But then David calls a meeting "Since I started having dinner at Amy's each night, I shouldn't have to chip in for the groceries." Matt then pipes in: "I'm so busy studying and using the internet that I never have time to watch TV. I don't want to pay for the cable TV anymore. And Mare, since your friend Jennifer cars here most evenings, you should pay a double share of the grocery bill." Mine replies, "If that's the way you feel, Matt, then you should pay for the internet access since you're the only one around here who uses it!" What happened? The friends originally agreed to share the costs equally. But they are not participating equally in watching cable TV, using the internet, and eating the groceries Splitting these costs equally is not equitable. The roommates could use a cost allocation approach that better matches costs with the people who participate in the activities that cause those costs. This means splitting the cable TV costs between David and Marc, assigning the internet access cost to Mart, and allocating the grocery bill one-third to Matt and two-thirds to Marc. Exhibit 4-1 compare the results of this refined cost allocation system with the original cost allocation system. No wonder David called a meeting! The original cost allocation system charged him $300 a month, but the refined system shows that a more equitable share would be only 5215. The new system allocates Marc $375 a month instead of $300, David was paying for resources he did not use (internet and groceries), while Marc was not paying for all of the resources (groceries) he and his guest consumed. The simple cost allocation syuen the roommates initially devised had ended up distorting the cost that should be charged each roommate: David was overcharged by $85 while Man and Marc were undercharged by an equal, but offsetting amount ($10 + $75 = $85). Notice that the total "pool" of monthly costs ($900) is the same under both allocation systems. The only difference how the pool of costs is allocated among the three roommates
