Cost and Allocation Methods for Computer Services

By Doost, Roger K. | The National Public Accountant, June 1990 | Go to article overview

Cost and Allocation Methods for Computer Services


Doost, Roger K., The National Public Accountant


Cost and Allocation Methods for Computer Services

Computer services account for a substantial portion of a company's budget. This article discusses the type of costs involved in running a computer department and elaborates on issues that deal with allocation of computer services to the using departments.

Costs of a Computer Center

A typical computer organization has a number of one-time costs up to the point of installation and running of a system and a number of recurring costs for periodic operation of the system. One-time costs include system design, system installation, system conversion, system site preparation, system hardware costs and system software costs. Recurring costs of a computer system typically include data preparation and conversion to the computer readable form; data transmission from the point of entry to the processing unit and back to the user upon processing; operation of the system; control of input, processing and output; documentation of programs and systems, maintaining of files on-line, on-site or off-site; operating system and application program maintenance; data base management system maintenance; operations' security and data processing administration. Costs may also be classified in terms of hardware costs, software costs, personnel costs and operating costs.

Benefits of a Computer System

Benefits of a system can be measured in terms of efficiency as well as in terms of customer satisfaction, employee morale, inventory reduction and long-term competitiveness of the organization. Cost/benefit analysis is a necessity in conjunction with studying the feasibility of a proposed system. Many of the anticipated benefits may be intangible and hard to quantify. As such, a seasoned judgment is necessary in conjunction with selection of any system. Because of typical high-dollar-value investments in computer technology and the risks of obsolescence associated with such an investment, the options of renting, leasing or purchasing must be weighed carefully. In either case, the initial one-time costs must be depreciated during the anticipated life of an investment, whereas the periodic costs of renting or lease payments would be directly included as part of the operating expenses.

Objectives for Computer Cost Allocation and Pricing

The following are often cited as the most important objectives in cost allocation and determination of the cost of computer services(1): a) equitable allocation of the computer resource to its most worthwhile uses while discouraging frivolous use; b) motivation of computer management and personnel to provide efficient, high-quality service to users; c) establishment of an objective basis upon which to evaluate the performance of computer management and d) encouragement of user interest and participation in the development and implementation of information systems.

The above classification provides the framework for internal pricing and cost allocation for computer services. Without charging the users for computer services, a frivolous and unchecked rise in computer costs would result. Through creation of a pricing mechanism, the computer center would be motivated and required to provide services at reasonable prices, and computer management would be evaluated based on the level and quality of service that they are able to provide for their users within the guidelines established and the budget restrictions imposed. Finally, users would get more directly involved in understanding what computer resources cost and how they can benefit from those services.

Approaches to Pricing of Computer Services

Computer services may be priced based on market or cost. Market pricing is contingent upon being able to determine the comparable cost for a computer service by service bureau or time-sharing organizations and charging the users based on those rates. This is a profit center approach to pricing which is a good practice both for motivation and efficiency in proper use of computer services.

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