The process of allocating IT cost is significant in any organisation. The CIO of any given organisation should have the following questions in mind when making allocations of resources in the provision of IT services. How can IT services be fairly charged? Can It services be charged for correctly? Finally, what value is the organisation expected to gain if granular charging model are used? The paragraph that follows describes the process of resource allocation for IT costs having the above questions in mind (Israel, 1979).
The allocator of costs for IT should first identify the actual costs that are needed in the organisation to implement the project. The gains that the organisation are expected to get from the IT services. The best thing for IT is to adopt a flat for the delivery of IT services in order to avoid a situation where there are unnecessary overheads and to ensure the project operates efficiently. No matter the length of the IT project a set of daily rate should be charged in order to ensure the IT department shall break even. The day to day services should also be recharged these costs should be those well known such as licenses.
I totally agree with the above approach of IT cost allocation as outlined above. This approach is helpful with bid work, where standard daily IT rates can be charged and then the organisation resell this service at the market value at the time (Bent, 2002). This helps the organisation to generate additional revenues and this play a role in transforming the IT department to a centre of income generation to the organisation.
Purpose of the allocation
The purpose of allocation is to aid the organisation in implementation of new technologies and transformational changes. The reason being, that aiding the process and organisation change has a direct impact on the organisations profitability. The CIO is aware that a progressive IT department that, brings the purpose, of allocation is to aid the organisation in implementation of, new additional, value by aiding the organisation with transformation, providing thought leadership and a somehow continuous improved projects, is crucial in driving the organisation forward and helping it to achieve greater levels in terms of support. Thus, there is a need for allocation of cost in the IT department (Stephen, 2007).
Benefits of allocation
The allocation of costs is vital as it gives a broad overview of profitability and helps in the process of setting realistic prices. Though this need to be clear as possible, there is debate generally on dissatisfaction and frustration caused by the financial performance of the IT department and its failure to be playing in adding value in the organisation. The allocation process helps the IT department to prove that it can be part of adding value to the organisation through the revenues it generates by providing IT services (William, 1968). Another benefit of allocation is that it helps in implementation of new technologies and transformation changes in the organisation.
ABC and Lean Manufacturing Costing
There is a big difference between the methods of costing adopted by ABC and Lean Manufacturing. ABC has adopted marginal costing approach; on the other hand, Lean Manufacturing has adopted absorption costing approach. Marginal costing approach is where we ascertain the marginal cost or extra cost or variable costs of a given product while absorption costing is where we ascertain the cost of production.
Both marginal and absorption costing are traditional costing methods but, they have the following unique principles that separate them;
(a) in absorption costing contribution is not calculated while contribution is calculated in marginal costing.
(b)in valuing the stocks only variable costs is considered under the marginal costing, while in absorption costing in valuing the stock costs incurred are during production are considered.
(c) And finally, the value of inventory is higher in absorption costing than in marginal costing.
The following formats are adopted by ABC and Lean Manufacturing during preparation of their income statements.