Allocation During a Recession, or Any Kind

¶ … Allocation During a recession, or any kind of economic downturn, IT budgets come under close scrutiny. Organizations want to make sure that they are making the most of their money and IT investments are often among the first to be examined for potential cuts. Furthermore, the way that IT costs are allocated also makes a substantial difference because of the way different systems account for value. For example, under a traditional flat fee system, inefficiencies may be hidden and it can also negatively influence user behavior.

This paper will look at some of the benefits and limitations in different accounting systems for IT services. Flat Fee Structure A flat fee structure is among the most common forms of IT allocation. The advantages of this system are that it is much simpler to work with. For example, bundling all of the fixed costs into one cost pool can make accounting and bid work much more efficient and less time consuming.

An IT group can allocate the costs that are completely visible to a particular project while distributing the shared or fixed costs by a flat fee measure (Branton, 2010). It has been argued that such an accounting system can reduce costs through its simplicity. Proponents of such a system argue that more elaborate systems of charging for costs will never be clear cut and ultimately an accountant somewhere will have to make a judgment call about how best to allocate costs (Branton, 2010).

Thus, since it will eventually be a matter of guesswork anyway, it is best to keep the costing system as simple as possible. This will not only save time with accounting work but the organization is more likely to trust the charging model that it employees because they will be able to understand it easier. Activity-Based Costing Other systems are definitely more elaborate than the flat fee model.

One example is activity-based costing (ABC) which divides fixed costs in to various cost pools which can be allocated more accurately to the work being done. By contrast, flat fees and unit costs based on averages hide inefficiencies and cause bad behavior (Apptio, 2010). Furthermore, it is argued the more transparent the costs are because of proper allocation then the easier it is for organizations to create efficiencies and institute cost savings measures; while a flat fee system would keep many of these opportunities hidden.

A simple system may be good when an organization is just starting out. However, as IT systems become more advanced and the departments more critical in regards to their financial contributions, then the accounting systems must advance along with them. A flat rate system isn't.