Allocating the Cost of Accounting for Computer Services

By Doost, Roger K. | The CPA Journal, June 1996 | Go to article overview

Allocating the Cost of Accounting for Computer Services


Doost, Roger K., The CPA Journal


Knowing where to spend, when to spend, and how much to spend for computer services requires extensive knowledge and expertise. Many organizations have steering committees that coordinate, forecast, and determine direction and need. Often there are project development teams comprised of members of affected departments who oversee the implementation of a project from inception to end. With regard to priorities and needs related to computer software and hardware, they all must deal with the uncertainty of what will become available next month and next year. Product Costing The costs of all service centers, including the computer department, need to be apportioned to final cost objectives-the producing departments, the products that the entity manufactures for sale, or in case of service organizations, to each specific service or program. From a pure cost allocation standpoint, an arbitrary allocation base could be used to simply zero out any balance in the computer service area. Even such an allocation helps, no matter how imperfect, to measure the impact of computer costs on product costs, inventory values, and cost of goods sold. Pricing Methods Pricing computer services can be market-based, cost-based, or flexible. Marketbased pricing is established by what competitors or outside sources charge for similar services. Cost-based pricing reflects how much the service actually costs. Flexible pricing is used when different rates are instituted for service required during peak demand time (at higher rates) in order to spread the services to nonpeak periods (at lower rates).

Market-Based Pricing. This may be used when the computer department is also a profit center and similar services are readily available in the marketplace. For example, a payroll department obtains a quotation from a service bureau for processing the weekly payroll, payroll checks with pay stubs, payroll register, Federal employee tax report, state employee tax report, labor department employee tax report, and any other auxiliary reports required. The payroll department is then in a position to expect the computer department to charge no more than the market price available for such services.

Market-based pricing has certain advantages. It is the most objective method of determining a price for a service. It forces the computer department to be more cost conscious and competitive. If the computer department consistently loses money charging the market price, it may be reflecting poor management or underutilized resources. It may be worthwhile to shut the internal service down and outsource the service. Another advantagethe user who is charged for computer services at market prices thinks before placing an order and compares prices before making a commitment for a service, even if the user doesn't have the option of going elsewhere.

Something to watch for when market prices are used is the committed versus the needed level of service. What if the production department asks the computer department to produce daily labor efficiency reports and the commitment is budgeted at a cost of $195 per report or an annual cost of $71,175 for the 365 days of operation. The production manager, later squeezed for cost control, decides he can get by with weekly efficiency reports, each of which cost the computer department roughly the same as each daily report. The expected cost now would be 52 weeks times $195 or a total of $10,140. What should be the charge to the production department? One solution is to continue the daily charge of $195, at least for the balance of the current budget year, because many computer resource commitments are long-term-equipment and the software has probably been purchased or leased on a long-term basis. Labor and management contracts may be long-term and not easily adjustable. Where capacity requirements are not easily adjustable, the problem is probably not solvable through alternative charging schemes. As an option, the computer department may be allowed to market its excess capacity to outsiders and release the committed department, when such markets are available. …

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