Output Budgeting-Selected Case Studies

8/14/2019 Output Budgeting-Selected Case Studies

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Case Studies Session-4C by Tarun Das 1

Output Costing and OutputBudgeting

Session-4B: Case StudiesProfessor Tarun Das


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Contents of thispresentation

1. Cost allocation- an example

2. A case study for output

costing3. A Case Study for Costing

Government Services


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1.1 Cost Allocation- An Example

A department has a policy division and aspecialized computing division.

The computing division consists of about ten percent of departmental staff.

Mainframe computer is used solely by thecomputing division and operates at around 70 percent capacity with a capital cost (includingdepreciation) of $50 000 per annum which is fixedregardless of its use.

Such spare capacity is not uncommon and arisesfrom a number of factors such as:

1. Lumpiness in the equipment capacity;2. Anticipation of more demands in the future;

3. And not having night shifts.


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1.2 Cost Allocation- An Example Department accepts a contract for data

processing from another agency over the next12 months to utilize 30 per cent idle capacityof the computer system.

Department hires two extra processing staff($80,000) to cope with extra workload.

Some new expenditure on training ($2500),equipment ($3000), and travel ($3000) is alsoexpected.

Overheads for the communications are alsoexpected to increase, while other overheadssuch as maintenance, rent and electricity areexpected to remain the same.


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1.3 Step-1 Specification ofOutput

Agencies apply inputs (e.g., man,

materials, money, machines) to theactivities and processes that generatethe products and services thatconstitute their outputs.

These inputs include the fundsappropriated to them from the budgetor received through purchaser/provider arrangements, and revenueraised through other means, such assales, user charges and taxes orcontributions by trade and industry.


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1.4 Cost structure at Departmentallevel


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1.5 Principles for Cost Allocation

(a) Cost of capital (computer) - Full cost chargeddirectly to the division, then pro-rated to the

contract based on capacity usage (i.e., 50,000 x30%=15,000).(b) Computing labor (systems) - Pro-rated to the

contact based on capacity usage(i.e., 150,000 x 30%=45,000).

(c) Computing labor (processing- The cost(80,000) of the additional staffrequired toservice the commercial activity is chargeddirectly to the contract. Processing labour usedfor non-commercial functions (350,000) is not

charged to the contract.


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1.6 Principles for Cost Allocation

(d) Policy and program labor - Not allocatedto the division as functions are unrelated.

(e) Executive labor- Pro rated on thepercentage of commercial staff to totalstaff (2% x 400,000=8,000).

(f) Other corporate labor-

350,000 x 2%=7,000

(g) Training- Training for the contact staff ischarged directly (2500).

(h) Furniture & fittings-100,000x2%=2000(i) Other equipment- The cost increase(3000) is charged directly.


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1.7 Principles for CostAllocation

(j) Rent 1000,000 x 2%=20,000(k) Electricity- 170,000 x 2%=3400

(l) Travel - Charged directly=3000

(m) Telecommunication- 275,800 x 2%=5516, say 5500

(n) Stationery-80,000 x 2%=1600


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1.8 Allocation Results


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2.1 A Case study for OutputCosting

The University of Australias

Economics Dept has decided toundertake Output Costing, andconsiders the following subjects ascost objects:

1. Accounting;2. Economics;3. Econometrics; and4. Applied mathematics. The Departments Cost Pools include:

1. Library;2. Lecturers;3. IT;4. Enrolments


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2.2 ABC- GL Information

Cost pools (Cost) General Ledger Expenses Expense (A$)Library ($40,000) Library staff wages 20,000

Book purchases 15,000Library consumables 5,000

Lecturers ($112,000) Accounting lecturers wages 15,000Economics lecturers wages 15,000Econometrics lecturers wages 16,000

Applied Maths lecturers wages 16,000Other lecturers wages 35,000Lecturers travel 12,000Lecturers subscriptions 3,000

IT ($125,000) Help Desk costs (including wages 75,000Software subscriptions 50,000

Enrolments ($18,000) Enrolment staff wages 10,000Enrolment office consumables 8,000


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2.3 Distribution of Cost Drivers- Survey Results

Cost DriversAccounting Economics Econometrics AppliedMath Total

Libraryborrowing

250 500 50 200 1000

Lecturertime (%)

25 30 10 35 100

Help deskrequests

45 15 25 25 110

Studentenrolment

50 75 25 100 250


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2.4 Distribution of Cost Drivers(in proportion to total)

Cost DriversAccounting Economics Econometrics AppliedMath Total

Libraryborrowing

0.25 0.50 0.05 0.20 1

Lecturertime

0.25 0.30 0.10 0.35 1

Help deskrequests

0.41 0.14 0.23 0.23 1

Studentenrolment

0.20 0.30 0.10 0.40 1


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2.5 Distribution of Cost Drivers(in proportion to total)

CostDrivers Accounting Economics Econometrics AppliedMathTotalcost

Libraryborrowing

0.25 0.50 0.05 0.20 40000

Lecturertime

0.25 0.30 0.10 0.35 112000

Help deskrequests

0.41 0.14 0.23 0.23 125000

Studentenrolment

0.20 0.30 0.10 0.40 18000


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2.6 Distribution of total costfor Cost Drivers

C o s t D


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2.7 Activity Based Costing


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3.1 Case Study- Costing GovtServices

Computer West is a division of a dept providing ITto other govt agencies.

Division's service is shown in the dept's budget as'IT Installation & Support' having two activities 'Installation' and 'Support'.

Division operates from a building owned by a parent

dept. Building has an underground storage area forvehicles and supplies of electronic equip, electronicsecurity system, offices and communication equipfor support services.


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3.2 Annual Cash Flow Profile


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3.3 Cost excludes capital depreciation


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3.4 Cost excludes capital charges(assumed to be 6 per cent of capital

cost)


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3.5 Other excluded items of cost

Head office overheads The Computer West Division has to bear its

share of the dept's administrative costs foritems such as the chief executive's salary.Its share of these costs is estimated to be$96,000

Services received free of charge For the purposes of this exercise, theparent depts accounts are assumed to beaudited at no charge by the Office of theAuditor General. The value of this service is

estimated to be $30,000 of which theDivisions allocated share is $10,000.


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3.6 Estimated Full Cost of Service


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Thank you

Have a Good Day

Output Budgeting-Selected Case Studies

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