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Mihut, M., and N. Tomai. 2010. A Cost Model for the IT Department. Journal of Applied Quantitative Methods, Vol. 5, Issue 2, pp. 358-364.

The belief that a busy IT department is profitable or at least cost effective is not true. The intent of this paper is to introduce a precise method for calculating the costs of operating an IT Department. The method described extends the cost model proposed by HP Laboratories with the activity-based costing method.

The HP cost model for planning, development, and operation of an organizations data center includes: cost of power delivery, cost of cooling, cost of space, and cost of operation.

Brief comparison of activity-based costing with traditional costing. Benefits of ABC include: offers better way understanding various costs involved, improves performance by increasing cost visibility, provides better information to management for resource allocation, and offers competitive cost advantage.

Method of implementation: determine costs of cost of power delivery, cooling, space, and operation. Identify activities and cost drivers. Group activities into cost pools. Determine cost for each activity pool. Identify outputs. Assign activity costs to out puts.

Precision of ABC method increases with number of activities identified. ABC superior to traditional method because it uses an allocation model of indirect costs based on activities.

Review

The content of this article achieves the objective as stated by the authors, a method of calculating the cost of an IT department. This paper successfully combines two costing methods to create an improved approach for calculating and budgeting IT activities.

Managers in organizations with IT departments may find this method of gathering data useful for planning, organizing, directing and controlling functions.