Shared services are the backbone of any organization, regardless of its size or industry. From IT to HR to finance, these departments play a crucial role in ensuring the smooth functioning of a company. Just think about it – without IT, we wouldn’t be able to send or receive emails, and without HR, there would be no employee contracts in place. And let’s not even begin to imagine a world without finance, where salaries wouldn’t be paid on time.
While the importance of these shared service departments is undeniable, allocating their costs to specific areas can be a challenging task. It’s not always easy to directly attribute their activities and expenses to end products, customers, or sales transactions. However, it is a common practice to distribute the costs of shared services in a way that establishes a tangible connection. This ensures that the departments are adequately funded and can continue to provide their essential services.
One approach to cost allocation is linking shared service costs to a production department based on a mutually recognized driver. While it may be tricky to assign HR costs directly to a specific product, connecting them to a production department that relies heavily on HR services can be a feasible solution. By doing so, the costs of shared services can be distributed in a manner that reflects their impact on the overall operations of the organization.
The costs associated with shared services can be significant, especially in financial institutions where they can exceed 30% of all operational costs. Therefore, it is imperative to adopt an appropriate allocation method that accurately reflects the value provided by these departments. Various techniques can be employed for shared service cost allocation, including direct allocation, step-down allocation, reciprocal allocations, and waterfall allocation. The key is to use drivers that directly relate to the shared services department, such as headcount for HR, invoices for finance, and workplaces or licenses for IT.
Moreover, a growing trend in cost allocation is the application of the Activity-Based Costing concept, which treats shared service departments as internal entities with their own unique activities and services. This approach recognizes the specific value and activities provided by these departments and allows for a more accurate allocation of costs. One notable example of this is the Technology Business Management (TBM) framework, which provides a holistic view of IT costs and their impact on the entire organization.
In conclusion, shared service departments are essential for the smooth functioning of any company. While allocating their costs can be complex, it is crucial to establish a tangible connection between the services provided and the areas they support. By using appropriate allocation methods and drivers, organizations can ensure that shared services receive the necessary funding while accurately reflecting their impact on the overall operations. The evolving trend of applying the Activity-Based Costing concept further enhances the accuracy of cost allocation, ensuring that shared service departments are recognized for their unique activities and services.
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