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IT Cost Allocation

Revision as of 14:45, 14 August 2019 by User (talk | contribs)

What is IT Cost Allocation

Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.

Cost allocation is used for financial reporting purposes, to spread costs among departments or inventory items. Cost allocation is also used in the calculation of profitability at the department or subsidiary level, which in turn may be used as the basis for bonuses or the funding of additional activities. Cost allocations can also be used in the derivation of transfer prices between subsidiaries.[1]

A central question in management accounting is the allocation of support department costs. Support departments provide services to operating departments that directly add value to a product or service in the firm. The increasing use of information technology (IT) has resulted in the creation of another important cost category that contributes to overhead costs. Although increases in IT spending are expected to increase productivity and profitability, the results were typically mixed. This phenomenon has historically been labeled “the productivity paradox.” Recently, IT has more rapidly increased productivity and profitability in various organizations, but the productivity increase has been erratic and inconsistent. To remain competitive, managers have had to respond to these technological changes by investing heavily in IT. Hence, justifying IT expenses has been an increasing conundrum for CIOs of most organizations. The paper provides insight into cost allocation methods that can be used to distribute IT costs.[2]


See Also

IT Financial Management (ITFM)
Technology Business Management (TBM)
IT Chargeback
IT Cost Optimization
Federal IT Acquisition Reform Act (FITARA)
Total Cost of Ownership (TCO)


References

  1. Accounting Tools
  2. Cost Allocation and Information Technology Jamshed Jal Mistry