Distributed cost

From CEOpedia | Management online

Distributed cost is a method of assigning costs equitably to multiple areas. This approach is often used in the context of budgeting and resource allocation, as it allows for a more balanced distribution of costs. The main idea is to assign costs based on the amount of resource that is being used by each area, which ensures that the costs are spread evenly.

The process of assigning costs using the distributed cost approach typically involves four main steps. First, the total amount of the cost to be distributed must be identified. Next, the areas that will be receiving the cost must be identified. Third, a formula for determining the share of cost for each area must be developed. Finally, the cost must be distributed using the formula.

For example, if a company wants to distribute the cost of a new software system across four departments, the total cost could first be identified. Then, the four departments could be identified: sales, accounting, marketing, and operations. A formula could then be developed that takes into account the size of each department, the number of employees, and the amount of resources each department would use. Finally, the cost could be distributed according to the formula.

In summary, distributed cost is a method of assigning costs equitably to multiple areas. The process involves first identifying the total cost and the areas that will receive the cost, then developing a formula for determining the cost share for each area, and finally distributing the cost using the formula.

Example of Distributed cost

Distributed cost can be calculated in a variety of ways depending on the needs of the organization. For example, one method is to use a proportional share approach, where the cost is distributed according to the relative size of each area. If a software system costs $100,000 and the sales department consists of 30% of the organization, then the sales department’s share of the cost would be $30,000. Other methods for calculating distributed cost include using a per capita approach, where the cost is distributed based on the number of employees in each area, or an incremental approach, where the cost is divided based on the amount of resources each area will be using.

In summary, distributed cost can be calculated in a variety of ways, including using a proportional, per capita, or incremental approach. Each method takes into account different factors, such as the size or number of employees in each area, or the amount of resources that will be used by each area.

Formula of Distributed cost

The formula for distributed cost can vary depending on the situation, but typically involves a proportional distribution based on the amount of resources used by each area. For example, the formula could be represented as:

Cost Share = Total Cost * (Resources Used by Area / Total Resources Used)

In this formula, the cost share is the amount of cost that each area will receive, the total cost is the total cost to be distributed, resources used by area is the amount of resources used by each area, and total resources used is the total amount of resources used.

When to use Distributed cost

Distributed cost is a great way to ensure that costs are spread equitably among areas and departments. This approach can be beneficial when there is a need to allocate a fixed cost or a shared cost among multiple areas. It is also useful when there is a need to share the cost of a common resource, such as a software system, among multiple departments.

Distributed cost can also be beneficial when there is a need to allocate resources based on the relative size or usage of the areas involved. For example, when allocating the cost of a software system, larger departments with more employees may be allocated a larger portion of the cost.

In summary, distributed cost can be useful in a variety of situations, such as when there is a need to allocate a fixed cost or a shared cost among multiple areas, or when there is a need to allocate resources based on the relative size or usage of the areas involved.

Types of Distributed cost

There are several different types of distributed cost, each of which is suited to different types of budgeting and resource allocation.

  • Fixed cost distribution involves assigning the same amount to each area regardless of the size of the area or the amount of resources used. This type of distributed cost is often used when the budget for each area is already established and the cost must be divided evenly.
  • Variable cost distribution involves assigning costs based on the amount of resources used by each area. This type of distributed cost is often used when the amount of resources used by each area needs to be taken into account in order to ensure equitable distribution of costs.
  • Proportional cost distribution involves assigning costs using a formula that takes into account the size of the area, the number of employees, and the amount of resources used. This type of distributed cost is often used when the cost must be divided according to the amount of resources used by each area.

In summary, there are several different types of distributed cost, each of which is suited to different types of budgeting and resource allocation. Fixed cost distribution assigns the same amount to each area regardless of the size of the area or the amount of resources used, variable cost distribution assigns costs based on the amount of resources used, and proportional cost distribution assigns costs using a formula that takes into account the size of the area, the number of employees, and the amount of resources used.

Steps of Distributed cost

  • Step 1: Identify the total cost to be distributed.
  • Step 2: Identify the areas that will receive the cost.
  • Step 3: Develop a formula for determining the cost share for each area.
  • Step 4: Distribute the cost using the formula.

In order to assign costs using the distributed cost approach, the first step is to identify the total cost to be distributed. This could be the cost of a new software system, for example. Next, the areas that will be receiving the cost must be identified. This could include departments such as sales, accounting, marketing, and operations. Third, a formula for determining the share of cost for each area must be developed. This could take into account the size of each department, the number of employees, and the amount of resources each department would use. Finally, the cost must be distributed using the formula.

Advantages of Distributed cost

  • Increased efficiency: By distributing the cost of a resource evenly among multiple departments, the resource can be used more efficiently as each department can focus on their own task without worrying about the cost of the resource.
  • Improved budgeting: By distributing the cost of a resource across multiple departments, it can be easier to track and manage the budget of each department. This can help the company better manage its overall budget.
  • Reduced waste: By having a more equitable distribution of costs, the company can ensure that resources are being used more efficiently and less waste is generated.

Limitations of Distributed cost

Distributed cost has some limitations that should be considered when making budgeting and resource allocation decisions. One of the main limitations is that it can be difficult to accurately measure the amount of resources that each area is using. This can lead to an inaccurate distribution of costs, which can have a negative effect on budgeting and resource allocation decisions. Additionally, there may be costs that are hard to distribute equitably, such as overhead costs. Finally, the accuracy of the cost distribution can be limited by the accuracy of the formula that is used.

Other approaches related to Distributed cost

  • Activity-Based Costing: This approach uses activities as the basis for assigning costs. This means that the costs are assigned according to the activities that are being performed, rather than based on the areas that are using the resources.
  • Resource-Based Costing: This approach focuses on assigning costs based on the resources that are being used. This means that the cost is assigned according to the amount of resources each area is using.
  • Time-Driven Costing: This approach uses time as the basis for assigning costs. This means that the costs are assigned according to the amount of time that is being spent on each activity.

In summary, there are several approaches to assigning costs, including Activity-Based Costing, Resource-Based Costing, and Time-Driven Costing. Each approach has its own advantages and disadvantages, and the most appropriate approach for any given situation will depend on the specific needs and goals of the organization.


Distributed cost — recommended articles
Cost coding — Real cost — Process costing — Pareto analysis — Functional budget — Aggregate function — Threshold productivity — Costing system — Lot size

References

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