Identifying costs that benefit other parties within an organization can be tedious and time-consuming. The process may appear to require considerable effort, with questionable returns. Arthur Andersen can provide the expertise and manpower necessary to address costs and to identify where your organization can benefit from appropriate allocation of expenditures. To maximize the impact of this endeavor, we utilize a proprietary allocation methodology in tandem with software that simplifies the process and provides detailed documentation that might otherwise be lacking.

Overview of the Process

Arthur Andersen's Cost Allocation Process (AACAP) is designed to help you identify and collect critical information about headquarters operations while allocating costs to related parties that benefit from the services (beneficiaries). Fundamental to the process is a proprietary software tool that is significant for assisting global organizations in a complex and often tedious process. The program provides a foundation for collecting necessary information through:

  • Identifying costs to be allocated.
  • Defining entities to which costs are being allocated.
  • Defining the bases used to allocate costs.
  • Collecting information regarding costs (or budgets).
  • Describing and allocating both expenses and project costs.
  • Allocating costs to appropriate beneficiaries.

Benefits to Your Organization

AACAP provides an efficient and effective means of determining where expenditures should be allocated to beneficiaries. Direct benefits include:

  • Supports timely identification of expenditures to be allocated.
  • Ensures relevant tax implications considered upfront.
  • Ensures compliance with critical regulations.
  • Provides a reporting mechanism for cost allocations.

The Methodology

The methodology, which is the foundation for the AACAP, is an analytical process that determines where costs should be properly expensed. Expenditures are categorized into one of four types:

Large Direct Expenditures

Large direct expenditures are non-payroll expenses associated with the procurement of goods and services for specific beneficiaries. These expenditures should be allocated directly to the beneficiaries that are served by the procured goods or services.

Non-Stewardship Project Costs

Non-stewardship projects provide direct benefits to beneficiaries, such as providing assistance to distribution entities implementing new inventory software. Non-stewardship project costs are allocated to the appropriate beneficiaries.

Stewardship Project Costs

Stewardship projects benefit shareholders or the parent company by delineating the parent company's investments in its subsidiaries (e.g., preparation of annual reports or financial statements). As with non-stewardship projects, the cost of a stewardship project can be determined based on time or other cost allocation methods associated with a particular project. Stewardship project costs are allocated to the parent company.

Residual Costs

Residual costs are all remaining cost center expenditures. A portion of these costs will be allocated to the parent company as stewardship costs based on a ratio of time spent on stewardship projects to total cost center time. The remaining residual costs are then allocated to beneficiaries as appropriate.

Costs can be allocated on a variety of bases, including sales, headcount, square feet, COGS, etc.* Once the information is collected, the process produces both aggregate and beneficiary-specific reports that document cost allocations.

* You may want to speak with your tax advisor regarding tax implications of using a specific method for allocating costs.

The Process

There are three general phases in performing a charge-out analysis:

  • Data collection and information gathering.
  • Functional and economic analysis.
  • Recommendations and documentation.

Each phase is customized to meet individual demands. The data-gathering phase is imperative to understanding the organization, its cost center structure, related beneficiaries, and the types of activities which will generate expenditures needing to be allocated to various entities. During this phase, information is generated regarding benefits of activities and the amount of time allocated to various tasks.

During the second phase of the process, the data/information are analyzed using proprietary software which examines operations, allocates costs, and documents how costs have been allocated.

Subsequent to completion of the analysis phase, a series of recommendations are developed specific to a particular organization. Accompanying the recommendations is complete documentation supporting the methodology, including data collection through development of recommendations and reports. This documentation is designed to provide the background for responding to inquiries from relevant government bodies.

In Summary

The process of identifying costs that should be allocated to appropriate beneficiaries is a critical task that can take significant time and energy from other important projects. Arthur Andersen has the resources to assist you in managing this critical operation. In addition to providing a team with the expertise to make your cost allocation process a success, our methodology and software ensure that you will realize two critical benefits:

  • Ease of data identification, collection, input and processing.
  • Detailed, flexible documentation supporting allocation decisions.

The end result is a simplified process, which is easy to understand and is efficiently self-contained. Allocation decisions are logical and documented with several options as to how information can be viewed. In short, Arthur Andersen's Cost Allocation Process is an efficient means of approaching a strategic task effectively - a task which can have a significant impact on the bottom line.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.