Organization allocation of common costs across divisions and products

FedEx

My company if FedEx Express, the overnight courier company. The activity that is being studied is the foot courier division, a hypothetical transaction that involves an envelope picked up by a foot courier and shipped domestically. The costs associated with this transaction are primarily allocated to the pick-up side; the delivery side is treated as a fixed cost to the delivering station. Indeed, most of the costs associated with this transaction are fixed costs, once the envelope enters the network on the airplane. Prior to that point, the courier is one cost, reflecting the total costs of the route, and the station is another cost, reflecting the aggregate costs associated with multiple couriers and routes.

The company publishes data for FedEx Express, as follows:

FedEx Express

Q1 YTD

Revenue

Salaries & Benefits

Transportation

Rentals/Landing Fees

Dep/Amort

Fuel

Maintenance & Repairs

Intercompany charges

Other

Operating Income

There remain costs that are not allocated, mostly pertaining to the corporate overhead expenses of running the parent company, FedEx Corp. If these costs are allocated by share of revenue, FedEx Express would receive 64.3% of these costs. The unallocated costs are as follows (estimates only):

Unallocated Costs

Corporate Management

IT infrastructure

Interest

Total

Express share

61.728

This gives a new income statement with the Express division's share of the unallocated costs as follows:

FedEx Express

Q1 YTD

Revenue

Salaries & Benefits

Transportation

Rentals/Landing Fees

Dep/Amort

Fuel

Maintenance & Repairs

Intercompany charges

Other

Total unallocated costs

61.728

Operating Income

The value of having this information is that it paints a more accurate picture of the costs associated with the division. Express is the largest division at FedEx, and its size means that the cost of the executives needed to run it will be higher. The same can be said for other corporate expenses, including IT investments needed to run the global network of companies. Financing costs like the interest expense are also included among the unallocated costs, again because Express is roughly 2/3 of the total company, it receives the 64.3% share of the unallocated costs. With these allocations, it becomes apparent that Express is, on the whole, not as profitable as it is made out to be in the initial report. The same can be said for the other divisions as well, and there is value in understanding the company's cost structure fully.