Output Costing and Output

Budgeting
Session-4B: Case Studies
Professor Tarun Das

Case Studies Session-4C by Tarun Das 1

 Contents of this
presentation

1. Cost allocation- an example

2. A case study for output
costing
3. A Case Study for Costing
Government Services

Case Studies Session-4C by Tarun Das 2

 1.1 Cost Allocation- An Example
• A department has a policy division and a
specialized computing division.
• The computing division consists of about ten per
cent of departmental staff.
• Mainframe computer is used solely by the
computing division and operates at around 70 per
cent capacity with a capital cost (including
depreciation) of $50 000 per annum which is fixed
regardless of its use.
• Such spare capacity is not uncommon and arises
from a number of factors such as:
1. Lumpiness in the equipment capacity;
2. Anticipation of more demands in the future;
3. And not having night shifts.

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 1.2 Cost Allocation- An Example
• Department accepts a contract for data
processing from another agency over the next
12 months to utilize 30 per cent idle capacity
of the computer system.
• Department hires two extra processing staff
($80,000) to cope with extra workload.
• Some new expenditure on training ($2500),
equipment ($3000), and travel ($3000) is also
expected.
• Overheads for the communications are also
expected to increase, while other overheads
such as maintenance, rent and electricity are
expected to remain the same.

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 1.3 Step-1 Specification of
Output
• Agencies apply inputs (e.g., man,
materials, money, machines) to the
activities and processes that generate
the products and services that
constitute their outputs.
• These inputs include the funds
appropriated to them from the budget
or received through purchaser/
provider arrangements, and revenue
raised through other means, such as
sales, user charges and taxes or
contributions by trade and industry.
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 1.4 Cost structure at Departmental
level

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 1.5 Principles for Cost Allocation
(a) Cost of capital (computer) - Full cost charged
directly to the division, then pro-rated to the
contract based on capacity usage (i.e., 50,000 x
30%=15,000).
(b) Computing labor (systems) - Pro-rated to the
contact based on capacity usage
(i.e., 150,000 x 30%=45,000).
(c) Computing labor (processing- The cost
(80,000) of the additional staff required to
service the commercial activity is charged
directly to the contract. Processing labour used
for non-commercial functions (350,000) is not
charged to the contract.

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 1.6 Principles for Cost Allocation
(d) Policy and program labor - Not allocated
to the division as functions are unrelated.
(e) Executive labor- Pro rated on the
percentage of commercial staff to total
staff (2% x 400,000=8,000).
(f) Other corporate labor-
350,000 x 2%=7,000
(g) Training- Training for the contact staff is
charged directly (2500).
(h) Furniture & fittings-100,000x2%=2000
(i) Other equipment- The cost increase
(3000) is charged directly.

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 1.7 Principles for Cost
Allocation
(j) Rent –1000,000 x 2%=20,000
(k) Electricity- 170,000 x 2%=3400
(l) Travel - Charged directly=3000
(m) Telecommunication-
275,800 x 2%=5516, say 5500
(n) Stationery- 80,000 x 2%=1600

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 1.8 Allocation Results

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 2.1 A Case study for Output
Costing
• The University of Australia’s
Economics Dept has decided to
undertake Output Costing, and
considers the following subjects as
“cost objects”:
1. Accounting;
2. Economics;
3. Econometrics; and
4. Applied mathematics.
• The Department’s Cost Pools include:
1. Library;
2. Lecturers;
3. IT;
4. Enrolments
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 2.2 ABC- GL Information
Cost pools (Cost) General Ledger Expenses Expense (A$)
Library ($40,000) Library staff wages 20,000
Book purchases 15,000
Library consumables 5,000
Lecturers ($112,000) Accounting lecturers wages 15,000
Economics lecturers wages 15,000
Econometrics lecturers wages 16,000
Applied Maths lecturers wages 16,000
Other lecturers wages 35,000
Lecturers travel 12,000
Lecturers subscriptions 3,000
IT ($125,000) Help Desk costs (including wages 75,000
Software subscriptions 50,000
Enrolments ($18,000) Enrolment staff wages 10,000
Enrolment office consumables 8,000

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 2.3 Distribution of Cost Drivers
- Survey Results
Cost DriversAccounti Econo Econom Applied Total
ng mics etrics Math
Library 250 500 50 200 1000
borrowing

Lecturer 25 30 10 35 100
time (%)

Help desk 45 15 25 25 110

requests

Student 50 75 25 100 250

enrolment

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 2.4 Distribution of Cost Drivers
(in proportion to total)
Cost DriversAccounti Econo Econom Applied Total
ng mics etrics Math
Library 0.25 0.50 0.05 0.20 1
borrowing

Lecturer 0.25 0.30 0.10 0.35 1

time

Help desk 0.41 0.14 0.23 0.23 1

requests

Student 0.20 0.30 0.10 0.40 1

enrolment

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 2.5 Distribution of Cost Drivers
(in proportion to total)
Cost Accoun Econo EconomeApplied Total
Drivers ting mics trics Math cost
Library 0.25 0.50 0.05 0.20 40000
borrowing

Lecturer 0.25 0.30 0.10 0.35 112000

time

Help desk 0.41 0.14 0.23 0.23 125000

requests

Student 0.20 0.30 0.10 0.40 18000

enrolment

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 2.6 Distribution of total cost
for Cost Drivers

C ost D
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 2.7 Activity Based Costing

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 3.1 Case Study- Costing Govt
Services
– Computer West is a division of a dept providing IT
to other govt agencies.
– Division's service is shown in the dept's budget as
'IT Installation & Support' having two activities –
'Installation' and 'Support'.
– Division operates from a building owned by a parent
dept. Building has an underground storage area for
vehicles and supplies of electronic equip, electronic
security system, offices and communication equip
for support services.

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 3.2 Annual Cash Flow Profile

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3.3 Cost excludes capital depreciation

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 3.4 Cost excludes capital charges
(assumed to be 6 per cent of capital
cost)

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 3.5 Other excluded items of cost
Head office overheads
• The Computer West Division has to bear its
share of the dept's administrative costs for
items such as the chief executive's salary.
Its share of these costs is estimated to be
$96,000
Services received free of charge
• For the purposes of this exercise, the
parent dept’s accounts are assumed to be
audited at no charge by the Office of the
Auditor General. The value of this service is
estimated to be $30,000 of which the
Division’s allocated share is $10,000.

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 3.6 Estimated Full Cost of Service

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 Thank you
Have a Good Day

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