Accountants have long carried a stigma of being human computers that lack much of a personality, if any at all. Characteristics associated with accountants generally revolve around the nerdy and geeky image of a person sitting in a cubicle, crunching numbers away all day. Far from being an accurate stereotype, many do not realize how wide of a field the area of accounting is, as well as the work opportunities that come with being a professional accountant. In fact, the opportunities that exist for accountants are so vast that the word “accountant” simply doesn’t hold much significant meaning as a descriptive title anymore.
The role most commonly associated with accountants is the job of being a public accountant or bookkeeper. The accountants balances the books of a company, creating balance sheet s and income statements, keeping track of assets and liabilities, as well as monitoring accounts payable and accounts receivable. When it comes to tax time, these accountants also record and carry out taxation procedures for business each quarter, and can be hired by individuals to do it on a yearly basis. The common stereotype of accounting and their jobs generally revolves around these roles. It is a highly important role in every business, but most certainly not the only job that accountants are limited to.
When you work for a large company, the idea of cost allocation comes up frequently, especially anytime an important decision is made which results in the spending of the company’s assets. Cost allocation is defined as the assignment of costs to different departments, processes, or products within an organization. For example, if an investment company was to add a new department to the business, there would be many associated costs that both directly and indirectly get allocated to that new department. Some direct costs of the new department would be obtaining desks, supplies, and personnel to staff that specific department. Indirect costs could be the opportunity cost of the time that is being spent by human resources to hire the new employees, salaries paid to those contractors that build the structural addition to the building that will house the new department, and an increase in electricity bills paid by the company in order to build the new wing.
Every time costs are allocated, they are allocated to a cost object. In the example above, the cost object would be the new department being established. That is the reason the company is allocating costs, in order for the new department to exist.
Cost allocation is a main generator for revenue. Before the company decided to build the new department, they first probably weighed all their pros and cons. Although they knew they would need to put out a good chunk of money in order to fund the new department, they realized that the revenue they would make in the long run for establishing the new department would outweigh the money they saved if they chose not to, and used their current resources to produce the desired results. In other words, in deciding whether to use cost allocation for the new department, company executives who make these types of organizational changes first had to evaluate the efficiency of delegating responsibilities versus the efficiency of incurring unnecessary costs to have a new system/department put in place.
Another important factor to keep in mind when dealing with cost allocation is first before cost objects are set and money is allocated out, decisions need to be made as to which sector of the company should get the most money, least, etc. It is very common for large corporations to do some research on historical performances of each department to determine who has the potential to generate the highest annual revenue with what they are given. In other words, it would make sense to give the human resources department a large allocation this year since they will be directly working with the new department that is being created to ensure it is effective and efficient. On the other hand, a department that wasn’t closely related to or affected by the new department might get a lower stipend for that particular year. This other department, might even, in fact be considered an externality in this situation. Although they may have goals they are also required to achieve that are made easier with a larger allocation, they are “paying the price” for human resources and the new department getting the larger allocation. By definition, an externality is a cost or benefit imposed on other entities without their participation in the decision and without compensation for the costs or benefits imposed on them.