Xyberspace Consulting Cost Allocation Case California State University MBA 2014

1. RB
DC
SG
DR
MU
yberspace
Consulting
A Cost Allocation Case

3. • Background
• Single Rate
• Outsourcing
• Reciprocal
• Sequential
• Dual Rate
• Management Direction &
Incentives
• Questions
• Conclusion
Overview

4. RB
Background
Xyberspace
Consulting
Customer Care
TESG

5.
RB
Background
500
63%
250
31%
50
6%
EMPLOYMENT
Consultants
Customer Care Tech
Corporate Functions

6.
RB
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

7. RB
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

8. 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

9. 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

10. RB
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

11. RB
Reciprocal Cost Allocation
Step1
Calculate cost
running support
department
• Accounting $150,000 (10% of IT services)
• IT: $200,000 (10% of accounting services)
Step 2
Allocate 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 3
Prorate 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

12. RB
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.

13. RB
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.

14. RB
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.

15. RB
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

16. RB
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

17. RB
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=-
↑ ↑ ↑

18. RB
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.

19. 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.

20. RB
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

21. RB
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

22. RB
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

23. RB
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

24. RB
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

25. RB
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

26. RB
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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27. THANK YOU