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Allocation of Fixed IT Costs

Cost Reallocation

The links below lead you to the required background readings for the assignment.

First read the article below:

How to Create a System for Charging Back IT Services.

Next read comments about the above reference article.

ABC Costing is the Best Allocation Methodology.


You are required to read the above articles and to discuss the various issues of cost allocation in a 2 to 4 page paper by addressing the issues below:

1. Describe the process of allocation of IT costs. Do you agree with the approach? Why or why not?

2. What is the purpose of the allocation?

3. What are the benefits of the allocation?

4. Compare and contrast ABC Costing and Lean Manufacturing.

How is the decision making in this organization affected by the manner in which costs are allocated? Provide numerical support as needed.

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Solution Preview

DRAFT (please re-write in your words and add your own thoughts as OTAs may not write assignments for students).



The allocation of costs is an important issue and these two articles present two different views about how to do it. One approach considers the entire process of allocating to be a confusing burden (merry-go round). The other finds the effort to allocate costs the solving of a mystery that reveals the truth about the consumption of resources.

Purpose and Benefits of Allocating

The purpose of allocating is to understand your costs and therefore allocate time and capital wisely and price services at above cost. When done with care, allocations benefit firms by indicating who is using the resources and having those users absorb the cost of the consumed resources in their operations. By allocating, decision-makers get a true view of which divisions, products and activities are causing costs to occur and therefore they can price to cover the costs or competitively bid to get those activities done outside the firm for better prices. In a way, allocations are a magnifying glass permitting ...

Solution Summary

Response is 704 words (about two and a half pages) and gives you a draft to start on this project. The two views of allocation are discussed along with pros and cons of each. The criteria for when each might be superior is mentioned.