lec21cost_alloii - 10 Cost Allocation II – ¡ 15.501/516...

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Unformatted text preview: 10 Cost Allocation II – ¡ 15.501/516 ¡ ¡ ¡ ¡ Technology Death Spirals Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of 11 12 to Departments ¾ ¢ ¢ ¢ Allocation of Indirect Costs of a Cost Center Assume the following: IT Department costs $100,000/month 5 Departments have equal access to IT services Current allocation is $20,000/month to each C Allocation of Indirect Costs of a Cost Center to Departments Outside Dept. Cost Charge Result A $ 18,000 $ 20,000 Unhappy, wants out B $ 22,000 $ 20,000 Happy $ 30,000 $ 20,000 Happy D $ 30,000 $ 20,000 Happy E $ 30,000 $ 20,000 Happy Total $130,000 $100,000 13 Allocation of Indirect Costs of a Cost Center to Departments Outside Charge Charge Charge Charge Dept. Cost 1 st Iteration 2 nd Iteration 3 rd Iteration 4 th Iteration A $ 18,000 $ 20,000 exits B 22,000 20,000 25,000 exits C 30,000 20,000 25,000 33,333 exits D 30,000 20,000 25,000 33,333 exits E 30,000 20,000 25,000 33,333 exits Total $130,000 $100,000 $100,000 $100,000 ??? This is a “death spiral” -- a positive feedback loop. 14 Allocation of Indirect Costs of a Cost Center to Departments Outside Dept. Cost Charge A $ 18,000 $ 20,000 B $ 22,000 $ 20,000...
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lec21cost_alloii - 10 Cost Allocation II – ¡ 15.501/516...

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