Output Budgeting-selected Case Studies

Output Costing and Output Budgeting Session-4B: Case Studies Professor Tarun Das

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Contents of this presentation 1. Cost allocation- an example 2. A case study for output costing 3. A Case Study for Costing Government Services

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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 •

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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 labor350,000 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. Case Studies

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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) Telecommunication275,800 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. 2. 3. 4.

Library; Lecturers; IT; 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

250

500

50

200

1000

Lecturer time (%)

25

30

10

35

100

Help desk requests

45

15

25

25

110

Student enrolment

50

75

25

100

250

Library borrowing

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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 borrowing

0.25

0.50

0.05

0.20

1

Lecturer time

0.25

0.30

0.10

0.35

1

Help desk requests

0.41

0.14

0.23

0.23

1

Student enrolment

0.20

0.30

0.10

0.40

1

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2.5 Distribution of Cost Drivers (in proportion to total) Cost Drivers

Accoun Econo EconomeApplied Total cost ting mics trics Math

Library borrowing

0.25

0.50

0.05

0.20

40000

Lecturer time

0.25

0.30

0.10

0.35

112000

Help desk requests

0.41

0.14

0.23

0.23

125000

Student enrolment

0.20

0.30

0.10

0.40

18000

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2.6 Distribution of total cost for Cost Drivers

C ost D Case Studies

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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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