CHAPTER 16
Cost Apportionment: Do Not Do It Monthly!
Traditionally we have spent much time apportioning head office costs to business units to ensure they have a net profit bottom line. However, few ask the budget holders and business unit managers whether they look at these apportioned head office costs. I have never found any business unit managers who showed much interest other to complain about the cost of information technology (IT), accounting, and other apportioned costs.
In fact, these cost apportionments, besides slowing down reporting, often lead management to complain about strategic costs, which cannot be reviewed for a few years due to locked-in agreements (e.g., the accounting system).
Pareto’s principle reminds us that the hours spent processing levels upon levels of apportionments to arrive at some arbitrary full costing are not creating management information that leads to decision making. Corporate accountants often can arrive at full costing approximations through a more simplistic route.
Some better practices are:
- Keep head office costs where they are, as budget holders see them as uncontrollables in any case.
- Use product costing as periodic one-off exercises to understand a full costing situation.
- Develop a full costing model, if you really need one, in an appropriate planning application that has been designed with the big picture in mind.
- Engage in major process reengineering to simplify head office processes.
- Analyze head office costs by activities rather than ...
