Financial Statements
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Financial Statements
The Allocation Problem
7 July 2011
Abstract
This paper will discuss cost allocation and its relevance to different organization. Additionally, this paper will address cost allocation and the Federal Government as it pertains to the US Army Corp of Engineers as well as the City of Seattle and associated cost drivers. Additionally, the special division of Cost Allocation will be addressed as well as some ways in which this special division administers cost allocation for hospitals, colleges, and non-profit organizations will be discussed
Cost allocation attempts to identify some cost or group of costs with one or more cost objective. The cost objectives can be product, departments, or divisions. Cost allocation can be useful information for an organization that wants to know where the highest expenditures are and who is ultimately responsible for the expense. Cost allocation allows flexible, user-defined determination of cost or revenue pools and bases to allocate indirect expenses or revenues.
The United States Army Engineers Corps has a concern with cost allocation pertaining to reviewing alternatives to payment and the option or repayment responsibility. Regardless of which payment option is reviewed, the cost will remain the same. On the other hand, the responsibility of repaying the cost is different. Unfortunately, this is considered an essential part of the planning process as well as the cost-sharing responsibilities. Even though the Unite States Army Engineers Corps is a vital part of the Federal Government, cost allocation is extremely vital to the operation. The Engineers Corps must focus on different methods of repayment and make a decision as to the most effective course of action that would be in the best interest of the government.
If the cost as mitigation option is used, approximately 90% of the cost will be paid by the consumers. Additionally, the navigation purpose would be allocated approximately 10% of the cost which is non-recoverable. This decision would be very beneficial to organizations when they are spending taxpayers money and involving cost-sharing in the process. The most important reason why the Corps of Engineers are concerned with whether or not costs are allocated is the fact that it defines where the costs are attributed to.
In my opinion, to make effective and efficient cost-sharing decisions, sponsors must be knowledgeable of exactly what restoration costs will be allocated to them and what will be paid by the government. The sponsor will obtain this information from cost allocation.
The City of Seattles list of cost allocation factors lists each department and then the cost drivers behind those departments. Cost driver is the measure used to allocate or assign indirect costs to products. It is good to know where the costs are allocated and what drives the costs through the cost allocation factors. Therefore, the relevance of the list may be lost in its ambiguity regarding the General Fund. Also, the list of cost allocation factors often mentions “various factors and allocations” as a cost driver.
There should be a more uniform method of allocating costs and a more specific list. Although Seattles list does not give much useful information in regards to cost drivers, it is a good start in identifying cost allocation.
While it should not be used for managerial decision making, it can be used to show where the money is going and where the major costs drivers are located. Cost allocation usefulness easily translates to a government setting and provides relevant information to government officials and can provide information regarding effective and ineffective tasks and can be used when cuts need to be made by providing realistic costs that will be saved if the department is cut.
The United States Department of Human Services has a special division (Division of Cost Allocation) which is exclusively for the purpose of Cost Allocation. This division provides more accurate information on indirect cost being incurred on every person by the United States Government for providing them a healthier and better way of life.
The Division of Cost Allocation (DCA) comprise of four field offices and a national headquarters. The four field offices are Western, Central States, Mid-Atlantic, and Northeastern. The purpose of the DCA is to ensure the indirect costs which are paid by the Federal Government are fair and equitable and follow Federal guidance. The DCA reviews the rates for indirect costs and provides negotiation services for the