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Reallocation of Costs in Information Technology - Research Paper Example

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Reallocation of Costs in Information Technology

Process of Allocation of IT Costs When information technology is implemented within organizations, it is important to identify how the costs of this investment will be allocated within the books. Costs for any other investment for instance, physical assets (land, building, furniture, etc.) are easy to understand and allocate. However, allocation for information technology assets and expenses is more difficult to decide because information technology transcends departmental boundaries. Generally, the process used to classify information technology costs is a flat fee mechanism. So, the IT department sets out a specific standard rate for a project, irrespective what the length of the project would be, and who would be the team members within the project, as well as ignoring the level of experience and expertise involved in the project. So in each instance, whether it is project costs or expenses based on running of information technology within the organization, all are allocated as an average based on the number of employees within the organization. In most organizations, this is the method followed and is considered one of the easiest to use and implement. (Branton, 2010; Apptio, 2010; McCann, 2010) Purpose of Cost Allocation The primary reason why organizations allocate costs for information technology to various departments is to ensure that IT costs are accounted for. IT costs are not as easy to calculate and allocate like any other cost. For example, cost of using furniture is easy

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to calculate (depreciation), but cost of using a computer is not as easy to evaluate. Further, cost of investing in a piece of land is easier to comprehend, however, cost for investing in software may not be as easy to understand and allocate in the organization. Therefore, the purpose of allocation of IT costs is primarily to identify where information technology is being used, and to what extent. As a result, cost is then spread out in the organization based on the allocation mechanism that is in place. (Branton, 2010) Benefits of Cost Allocation There are various benefits of the right cost allocation system for information technology. IT helps the entire organization through various levels and in several ways. The costs incurred need to be charged back based on the usage of IT facilities and systems. With the right system, cost allocation is accurate and efficient indicating the extent of usage of IT across departments. Cost allocation is also helps in identifying the cost and business centers within organizations, which in turn helps determine where costs need to be curtailed and which areas are generating better business, in terms of information technology. (Branton, 2010) Comparison of ABC Costing against Lean Manufacturing Activity based costing specifically in the IT sector involves charging the actual costs resulting from information technology, in order determine the actual profit of the organization. As the name suggests, activity based costing involves calculating the actual costs that are incurred on each business activity, and then allocating them to the business or specific department from where the cost originated. In lean manufacturing, costs are based on indirect expenses as well as the actual, direct expenses. As a result, lean manufacturing involved a more detailed analysis of the cost structure, especially when it comes to information technology and costs incurred in this sector. (Apptio, 2010) Organization’

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Reallocation of Costs in Information Technology Reallocation of Costs in Information Technology Introduction With the rapid technological advances in the information technology sector, businesses have gotten confused as to how costs for IT can be allocated in their books…
Author : ernserlenora
Reallocation of Costs in Information Technology essay example
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