Cost Allocation


Cost Allocation

Margin pressure and the focus on performance management has in turn increased the importance of a correct, yet understandable, cost allocation to make well informed decisions about product portfolio changes.

  • Complaints from the organisation about unfair and non-transparent allocations
  • Increased questions and/or investigations into transfer prices
  • Margin pressure increases need for accurate cost
  • Need for portfolio optimisation
  • Need for global Costing and Charging is not supported by regional models

Drivers of Change 

  • Neither the front nor the back can explain the total costs of the business, partly due to unclear entity structure
  • Costs are run through multiple stages of allocations causing the same amount to be processed over and over again
  • Costs are allocated within the company without driving behaviour
  • View of opaque costs as HQ “tax” contributing to poor cost discipline
  • Process is constantly being “tweaked” ,causing surprises
  • Process is too complex, granularity has become the enemy of transparency

Common Symptoms 

  • A charging model that is well balanced between different client priorities in terms of simplicity and transparency
  • A front unit understanding of the drivers of the costs allocated to their unit, leading to increased acceptance and better discipline
  • Clear ownership of the cost generator (e.g. an IT application) by a sponsor who has an overview of the cost
  • A governance model in place that will help ensure that this is an ongoing finance process and not a one off exercise
  • Better decision making ability around portfolio and investment decisions
  • Increased timeliness, relevance and transparency of allocation reporting
  • Less time and effort spent on allocation of cost already incurred by the organisation, more focus on reducing overall cost

Benefits and outcomes