Allocation of Fixed Costs at Research Proposal

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Common costs are allocated when the cost falls under federal auspices. Costs that are the responsibility of the state, such as the 55% share of the San Luis Unit, are not included in the allocation base. Non-reimbursable costs are also not included in the allocation base and are ultimately the responsibility of the taxpayer. Some other costs are also not allocated, or are subject to unique allocation methods. These are also excluded. These include interest during construction and safety of dams' improvements.

Allocating costs for internal decision making allows managers to perform a more effective cost-benefit analysis on each project. The allocations are done on the basis of reimbursable costs. It is important for managers to understand how much of a project's cost structure is not reimbursable. However, for these public works projects, managers also need to understand the cost for each in order to make decisions with respect to utilization. The managers can apply the theory of comparative advantage to the usage of each facility in order to maximize the benefit and minimize the costs.

The impact on decision making of not allocating costs is that the managers have little understanding of the cost-benefit equation for the different facilities. This can lead to poor utilization decisions. Each facility may have different cost structures for different activities, but the managers will never be able to determine this without allocation.

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The may keep assets in use beyond their viable date or may underutilized certain assets.

The manner in which costs are allocated in this organization will inevitably affect decision making, in particular capacity decision making. If one facility is operating at less than capacity and has a lower cost structure for a given activity than another facility, all of that activity can be re-allocated. Additionally, management will make other usage decisions. If the demand function for each activity is taken into consideration, allocation will help management to make decisions with respect to prices charged to the private sector or with respect to minimizing burden on the federal taxpayer.

CVP's system of fixed cost allocation is highly complex, and this has led to a multitude of different errors. They need a system to assist with the management of their resources, and to make the most appropriate decisions for the various stakeholders. In order to do this, however, they will need to find ways to streamline the system. They have a new spreadsheet system to improve this, but if they streamlined the allocation system they would be able to yield more robust results more quickly. IN addition, some of the needless complexity should be cut out. If each asset is subject to essentially the same rules with respect to allocation, the quality of decision-making will improve because the quality of the….....

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