Allocation of Fixed Costs at

Allocation of Fixed Costs At CVP, there have been some deficiencies and errors in the allocation of costs of the different capital projects. The system has been developed patchwork, and it is becoming difficult for managers to fully understand its complexities. The result is that some criteria are even out of line with policy requirements or regulatory requirements. A study has been conducted to analyze the system and attempt to develop ways to improve the allocation process at CVP. The process of allocation at the CVP is somewhat convoluted.

There are seven different asset classes, each with its own allocation. Single purpose facilities are allocated to the CVP by purpose. Multi-purpose facilities as well, using factors calculated in 1975 (it is now 1999). The COE-transferred facilities are treated two different ways. Costs for Folsom Dam are allocation by Reclamation based on its own factors; five other facilities receive allocation from COE. Non-reimbursable costs represents another interesting category and our outlined by Congressional legislation. These costs are removed from the allocation base.

Authorized deferred use represents costs not yet incurred, but that have been authorized. If and when the additional capacity is required, it will be allocated to the eventual end users. The San Luis Unit is a joint venture with the state. The state's share, 55% is thus removed from the allocation base. The Western facilities are allocated by Western on the basis of their Results of Operations. The method begins with the disaggregation of the financial statements. The non-reimbursable costs are removed and assigned directly to their appropriate category.

The remaining costs are then allocated according to the prescribed factors for each category. Repayment is then calculated, with each component having its own schedule featuring multiple sub-allocations. Some of these, such as fish and wildlife repayment, will vary from year to year as a result of changes in the applicable legislation. In general I do not agree with the approach. There are elements that, taken individually, make sense, such as allocation based on purpose.

This allows a proper cost-benefit analysis to be done that can help to maximize the facility's overall effectiveness. However, there are two areas of concern. One is that allocation policy is conducted on an ad hoc basis. The policies are subject to the effects of a number of different pieces of legislation. Moreover, cost allocations factors are determined by a number of different agencies and based on factor information dating back as far as 1975.

Thus, while each component of the system makes sense individually, the system as a whole has been constructed piecemeal, with input from a wide range of stakeholders. This has the effect of compromising consistency. In addition, the complexity of the system increases the risk that some costs may be orphaned or forgotten, as the process of diaggregation and reaggregation is highly complex. 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. 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.