CAPTURE JANUARY 2016 Q1 ISSUE 01 | Page 13

2016 Q1 ISSUE COSTTREE CAPTURE. 13

capturing & understanding your true costs

COST ALLOCATION can be used by the financial leaders of all three of our example organizations to assign the shared service costs to the different products they offer. A cost allocation plan will assign a proportional amount of the costs of all contributing people, processes, intangibles, and infrastructure to each unit of product or service produced, giving the organization an accurate and defensible view of their true costs at a granular level.

NONPROFIT

Our nonprofit CFO can assign the costs of rent and utilities between the job training and the nightly shelter programs by the square footage each program utilizes of each building. Then to spread payroll costs to the number of paychecks issued to employees of each program, she can then assign a proportion of the payroll clerk’s salary to each program. By proportionally spreading these costs, the CFO knows how much funding is needed to sustain the nonprofit’s programs, or perhaps, identify if another shelter should be opened.

GOVERNMENT

Our city Finance Director can spread the costs of the IT department by the number of computers each department uses and assign cost of the legal department by the number of hours they worked on projects for each department. After assigning proportional amounts of the general fund shared service costs to the operating department, he will see the true cost of maintaining his parks, how much to charge for trash pickup and what it would cost to add a police officer to a beat.

PRIVATE

Our global car company’s finance team will work with their transfer pricing consulting firm to perform this now familiar process. Based on the number of cars sold, they will assign the costs of the customer support center to each business unit. The costs of human resources will be spread by employees per business unit. The cost of all shared services will be charged to each business unit. This ensures that an accurate and defensible cost and profit is calculated per country, for both mid-stream manufacturing and product sales. Thus, allowing the company to pay accurate taxes in each country and avoid double taxation; ultimately, maximizing operating efficiencies.

Governments, nonprofit and for profit organizations have very distinct missions, requirements and restrictions. However, they do share one driving commonality: they all want to deliver the best products and services in the most efficient manner possible. To succeed in any industry, visibility of the true cost of service is needed. By leveraging a cost allocation plan, true costs can be fully understood.

THE

SOLUTION

THE OUTCOME