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Understanding of Cost Reallocation

To get a better understanding of cost reallocation....

Cost Reallocation

The following link describes an organization's approach to inservice cost allocation: EXISTING CVP PLANT-IN-SERVICE COST ALLOCATION . (http://www.usbr.gov/mp/cvpwaterrates/cost_allocation_study/chapter3.pdf)

Required:
You are required to read the above article and to discuss the various issues of cost allocation:
1. Describe the process of allocation of costs in this organization. Do you agree with the approach? Why or why not?.
2. Identify those situations when common costs are allocated.
3. Explain the impact of allocating common costs for internal decision making.
Explain the impact of not allocating common costs for internal decision making.

Solution Preview

1. Describe the process of allocation of costs in this organization. Do you agree with the approach? Why or why not?
First, costs are broken down, those costs that are identified are assigned directly to the appropriate cost category. Secondly, those costs that are identified and allocated according to a congressional directive are allocated according to the directive. Third, those capital investments that are meant for one purpose only are allocated in full to that category. Fourth, for the multi-purpose facilities, cost is allocated using separable and joint cost allocation factors. Initially, the separable cost factors are applied to identify the portion of total costs allocated among projects as separable costs. The residual costs are allocated according to joint cost allocation factors. So the total costs allocated to a project is the sum of the separable costs and that portion of joint costs allocated to that purpose.

I do not agree with this approach because the cost allocation and the repayment schedule differ. In case of water supply the costs are distributed using factors on the type ...

Solution Summary

Here is just a sample of what you will find in the solution:

"For the purpose of allocating common costs for internal purposes, this type of cost allocation has two-fold implication. First, it helps identify those costs that are..."

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