The Allocation Problem

Paper Summary:

This paper discusses issues and problems related to the allocation of costs for an organization. It fist describes an organization's three-step process of allocating costs and how this is carried out. The paper then discusses the significant impact that the allocation of costs has on informal decision making in an organization. It also looks at the impact of not allocating common costs for informal decision making.

From the Paper:

"Decision making in the organization is affected by the manner in which costs are allocated. The decision makers typically must answer to stakeholder groups. Those groups only see the financial statements. They evaluate the work of the decision makers based on those results. The decision makers will naturally make their decisions based on what makes them look most effective. So the manner in which costs are allocated will thus drive the decision makers, and their choices may not be best for the organization unless costs are allocated accurately. For example, suppose a manager is faced with a choice between two projects, both funded jointly by the organization and a branch of government. If Project A has an allocation formula that places 70% of costs on the organization and Project B has an allocation formula that places 50% of the costs on the organization, the manager will choose Project B. The lower cost base gives the manager a higher likelihood of success. If the reality is that the costs are closer to 50/50 in both cases, then the manager has not necessarily made the best decision for the organization, but rather the decision that will look best for himself."

Sample of Sources Used:

• Capin, Gregory B. & Tanenbaum, Joel. How to Report a Joint Activity. Journal of Accountancy. Aug. 1998, Vol.186 Iss.2, p. 37, 7 pages.
• Lynch, Michael. Line Items. Journal of Accountancy. Nov. 1998, Vol 186 Iss. 5, pg.84, 1pgs.
• Kapoor, Manmohan Rai. Dueling Divisions: A new Dual Transfer Pricing Method. CMA. Mar. 1998, Vol. 72, Iss. 2, pg. 23, 4 pgs.

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