For cost allocation, simpler is better

Topics: Administration and Finance, Budgeting, Budget Models and Cost Allocations

Jacob Rosch

Jacob Rosch, Senior Analyst

Nov. 13, 2014

Distributing overhead costs across academic units can be challenging—and sometimes contentious. Most institutions lack the activity-based accounting tools required to calculate an individual unit’s precise share of overhead.

For select services, such as classroom space or utilities, directly metering each unit’s usage is an appropriate strategy. These services are both readily measurable and resources most leaders want to better ration across campus.

In most instances, though, metering has little or no impact, as services provide broad institutional benefits and costs are mostly fixed.

USC simplifies cost accounting to improve acceptance

For costs where metering is not possible, the simplest allocation formulas have proven most effective.

For example, when the University of Southern California implemented RCM in the 1980s, administrators created over 100 unique cost allocation formulae to distribute nearly every line item on the university’s budget to colleges. The system required significant time and effort to manage, and unit leaders found the model confusing and frustrating. For example, the law school had its own library, so questioned why they needed to pay for general library services.

In the mid-2000s, leaders moved to a radically simplified approach. It’s based on only four cost categories—Undergraduate Services, Graduate Services, General Administrative Services, and Research Services. For each category, units’ charges were determined by a single, easy-to-understand metric, such as number of students.

As hoped, this approach greatly reduced frustration among academic leaders, and more importantly, kept each units’ total cost allocation largely the same.

Learn More

For more information on other cost allocation methods, as well as case studies for 29 distinct budget model elements, read our study Optimizing Institutional Budget Models.

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