Xyberspace Consulting Case Analysis
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Transcript of Xyberspace Consulting Case Analysis
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RB DC SG DR MU
yberspace Consulting
A Cost Allocation Case
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• Background • Single Rate • Outsourcing • Reciprocal • Sequential • Dual Rate • Management Direction &
Incentives • Questions • Conclusion
Overview
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RB
Background
Xyberspace
Consulting Customer Care TESG
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Background
500 63%
250 31%
50 6%
EMPLOYMENT Consultants Customer Care Tech Corporate Functions
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Problem Actual costs were allocated at the end of the year and they were higher than the consulting group’s budget. The significant differences between the budgeted and actual cost rates surprised David Anderson • He received a large portion of the bill • Responsible for a profit center • Variation due to nothing on his part
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Single Rate Budgeted Actual +/-‐
Total Salaries $250,000 $265,000 $15,000
Benefits $50,000 $53,000 $3,000
So8ware Licenses $20,000 $27,500 $7,500
Deprecia?on $28,000 $28,000
Maintenance Contract $2,000 $2,000
Course Development $12,500 $12,500
Professional Development $10,000 $22,500 $12,500
Travel $8,800 $12,000 $3,200
Phone/Fax $2,600 $3,800 $1,200
Office Supplies $800 $800
Training Supplies $67,500 $64,775 $ (2,725)
Trainee Lunches $45,000 $56,250 $11,250
Other $500 $500
Total $497,700 $548,625 $50,925
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Advantages • Remove majority of variable and fixed costs associated with
the Training Department. • Rate of $500 per session
Disadvantages • Some fixed costs remain • Loss of customized training; potential loss of consultant
competitiveness
Outsourcing
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Outsourcing
New total falls between the case’s actual and budgeted training costs.
Category Cost
Salaries $75,000
Other $500
Training $450,000
Total $525,500
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Reciprocal Most accurate method • Recognizes reciprocal
services between service departments
Not common practice • Algebraic method
True cost • The cost to serve all
producing departments • PLUS the cost to
server the other support departments
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RB
Reciprocal Cost AllocationStep1
Calculate cost running support department
• Accounting $150,000 (10% of IT services)• IT: $200,000 (10% of accounting services)
Step 2Allocate the
prorated cost of reciprocal services
• Accounting= $150,000 + .10 (IT)• IT = $200,000 + .10 ($150,000 + .10 (IT)) • IT= $238,888.88• Accounting = $173,888,88
Step 3Prorate based on new cost structure
• Reciprocal• Care = 45%($173,888.88) + 45%($238,888.88) $185,750.00• Consulting = 45%($173,888.88) + 45%($238,888.88) $185,750.00
• Direct (SR)• Care = 50%($150,000) + 50%($200,000) $175,000.00 • Consulting = 50%($150,000) + 50%($200,000) $175,000.00
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Step Down Cost Allocation What is it and how does it work? • Allocates support costs to
other departments that consume and provide mutual shared support services provided among support non-support departments.
• One-Way Interaction between Support Departments prior to allocation.
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Step Down Calculations Does it apply?
• The Training department provides shared services to the Consulting and the Customer Care Groups but does not receive services from either.
• The Training department does receive support services from HR and other departments; there is no support information presented in the case.
• Based on the information presented in the case, the Step-Down method does not apply to Xyberspace.
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Step Down Calculations Reasoning
• Based on the data and the service utilization relationships presented the Step Down calculations simply confirmed the current problematic cost allocations.
• The Step Down allocation method is most appropriate when you have multiple departments both providing and receiving support services.
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Dual Rate Advantages • Proportionality (reduces the attendance disincentive) • Relatively inexpensive and easy to implement • *Relatively easy to explain to managers
Disadvantages • *Proportionally allocates the cost of idle capacity
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Dual Rate Method
Budgeted Actual +/-‐ +/-‐
Single Consul?ng 331,800
399,000 67,200 20% (# sessions) * (TC / T# sessions)
Customer Care 165,900
149,625 -‐16,275 -‐10% (# sessions) * (TC / T# sessions)
Dual Consul?ng 331,800
365,750 33,950 10% (FC * 2/3) + (VC * 2/3)
Customer Care 165,900
182,875 16,975 10% (FC * 1/3) + (VC * 1/3)
Advantage: Proportionality reduces the attendance disincentive
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Costs
Budgeted Sessions Actual Sessions +/-‐ Consul?ng 600 600 0
Customer Care 300 225 75
900 825 75
Disadvantage : Proportionality allocates the cost of idle capacity
Practical Capacity Productive Capacity Idle Capacity =- ↑ ↑ ↑
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Management Direction & Incentives • Senior Management should reiterate the training
directive of the CEO. • Corporate goal to have “absolutely the best-educated
consultants” • Each employee is required to receive one full week of training
twice a year.
• Each manager should have the goal of achieving 100%, training participation. This goal should be incorporated in the annual review and bonus system.
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Questions #1. Did the Training and Educational Services Group’s use of a
single rate cause its services to look too expensive to the Consulting and Customer Care Groups?
Yes. Budgeted: $497,700/900 sessions = $553
Actual: $548,625/825 sessions = $665
Single rate does not take into account the fixed costs and variable costs separately.
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Question #2 Would a dual rate, which separates fixed from variable costs, better capture the true costs of the training?
Yes • Provides equitable allocation of cost • Fixed cost is paid independently of participation • Reflects the cost of running the service department • Variable cost is paid based on participationReflects cost incurred
by each training session
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Question #2 Cont.
Budget Actual Budget Actual Total Cost $ 363,800.00 $ 389,300.00 Total Cost $ 133,900.00 $ 159,325.00
Care Alloca?on $ 121,266.67 $ 129,766.67 Care Alloca?on $ 44,633.33 $ 53,108.33
Consul?ng Alloca?on $ 242,533.33 $ 259,533.33 Consul?ng Alloca?on $ 89,266.67 $ 106,216.67
Sum Alloca?ons $ 363,800.00 $ 389,300.00 Sum Alloca?ons $ 133,900.00 $ 159,325.00
Budget Actual
Total Cost Care Consul?ng Total Cost Care Consul?ng
Fixed $ 121,266.67 $ 242,533.33 Fixed $ 129,766.67 $ 259,533.33
Variable $ 44,633.33 $ 89,266.67 Variable $ 53,108.33 $ 106,216.67
Sum of alloca?ons $ 165,900.00 $ 331,800.00 Sum of alloca?ons $ 182,875.00 $ 365,750.00
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Question #2 Cont.
$331,800
$165,000
$399,000
$149,650
$365,750
$182,875
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
Consulting Care
ALLOCATION COMPARISON Budget Actual Dual rate
Original Actual Difference between single and dual rate Proposed Actual
Care Consul?ng Care Consul?ng Care Consul?ng
$ 149,625.00 $ 399,000.00 $ 33,250.00 $ (33,250.00) $ 182,875.00 $ 365,750.00
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Question #3 Should budgeted or actual rates be used to allocate training costs to the user groups ? • Budgeted rates should be used. Each manager is
responsible for managing their budget and actual expenditures.
• Other managers or departments should not be affected by the poor budgeting or budget mismanagement of another.
• Budgeting is about more than the dollars. Budget is a means to managing a company’s strategy and performance.
Question #3
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Should the user groups be allocated training costs based on their budgeted or actual usage of services? • During the budgeting process the goal is to be as accurate as possible.
In situations of shared services, the allocation of actual costs should be applied monthly or quarterly for better variance management.
• When shared services are involved fixed costs should be allocated across all of the departments that use the shared service. Allocation rates should be based on the proportional use of each group.
• Variable Costs should be allocated based on actual usage of training services by respective groups
Question #4
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How should the cost of the TESG be allocated? • Should allocate budgeted costs based on the dual
rate method because it takes fixed and variable costs into consideration.
Question #5
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Recommendations Dual Rate
More precise than single rate (closer to the bull’s-eye) FC budgeted proportionally, as in single rate Actual FC allocated proportionally even if one group doesn’t meet their targets VC allocated equitably based on actual usage Relatively easy and inexpensive to advocate and implement
Management Incentives Director’s evaluations and bonuses should incentivize attendance
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THANK YOU