![]() Thus, to ensure effective use of the IT resources there must be some association of cost or allocation between the internal demand and consumption by each business unit. If there is no cost associated with the usage of IT resources by different business unit, than each unit will utilize the the IT resources to maximize its potential benefit to the detriment of the corporate as a whole. The paper provides insight into cost allocation methods that can be used to distribute IT costs. ![]() Hence, justifying IT expenses has been an increasing conundrum for CIOs of most organizations. To remain competitive, managers have had to respond to these technological changes by investing heavily in IT. 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. Although increases in IT spending are expected to increase productivity and profitability, the results were typically mixed. The increasing use of information technology (IT) has resulted in the creation of another important cost category that contributes to overhead costs. Support departments provide services to operating departments that directly add value to a product or service in the firm. Ī central question in management accounting is the allocation of support department costs. Cost allocations can also be used in the derivation of transfer prices between subsidiaries. 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. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.Ĭost allocation is used for financial reporting purposes, to spread costs among departments or inventory items. A cost object is any activity or item for which you want to separately measure costs. 3 Strategies for IT Cost Allocation Ĭost allocation is the process of identifying, aggregating, and assigning costs to cost objects.
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