Allocation of Fixed Costs, Essay Example

Cost allocation in CVP is guided by various legislation, agreements and policies governing the allocation of these costs. The costs are first disaggregated to identify the reimbursable and the non-reimbursable costs. The non-reimbursable costs are identified and assigned directly to the appropriate non-reimbursable cost category. Once this is done, the remaining costs are the total capital investment to be allocated to the authorized project purposes of the CVP. For the single-purpose facilities, costs are allocated in total to the purpose served. For multiple purpose facilities, the allocation of costs is done using both separable and joint cost allocation factors. These factors are the based on the results of the 1975 reallocation study that was completed using the SCRB method. The separable costs factors are applied to identify that proportion of total costs allocated among projects as separable costs. The remaining costs are the allocated among multiple purposes using the joint allocation factors. The total allocation to each project purpose is the sum of separable costs and that proportion of joint costs allocated to the purpose.

The process of allocation of costs at the Central Valley Project is based on a study that was carried out in 1975 using the SCRB method. Since 1975, the circumstances under which CVP operates have substantially changed and hence the costs incurred. There are also costs that cannot be classified under the two categories.  The allocation of costs incurred on multi purpose facilitates is also not clearly done. This would lead to allocation of costs in a certain facility that is more or less than the actual cost incurred.

Situations where common costs are allocated include the allocation of costs to water supply purpose where these costs are further sub-allocated among the M&I, irrigation and wildlife refuge water use in proportion to their respective water deliveries. The distribution of costs is done using factors based on the type of facility used in proportion to the amount of water stored, conveyed or distributed to each function. Common costs allocated to wildlife refuge water supply function are further sub-allocated among reimbursable and non-reimbursable functions based on cost sharing criteria as stated in the CVPIA.

The allocation of common costs to internal decision making ensures that the cost allocated to each cost centre reflects the correct cost incurred by each project or cost centre. This also ensures that the exact cost incurred in internal decision making can be established hence enabling an accurate allocation of cost to the whole project. As a consequence, the necessary care is taken in the internal decision making in relation to costs incurred. The allocation of common costs to internal decision making would also slow the decision making function since the allocation and the method of allocating these costs has to be established.

Where common costs are not allocated to internal decision, the accurate cost incurred in each of the project cannot be established since the common costs attributable to internal decision making are absorbed by the various projects. This leads to an inaccurate cost being attributed to a certain project. However, decisions are made faster where common costs are not allocated to internal decision making since no effort will be wasted in trying to determine the common cost attributable to internal decision making.

Decision making at the Central Valley Project (CVP) is greatly influenced by the allocation of costs. This is because the allocation of costs involves many parties and various legislation, policies and agreements. These procedures would serve to slow the rate of making decisions at CVP since all parties have to be involved. Cost allocation and repayments as of September 30, 1999 indicated that M&I water users had repayment responsibility of $ 436.5 million, irrigation water users had $1,476.3 million while commercial power customers had repayment obligation of $568.8 million. The federal and state governments also had corresponding obligations. This indicates that for decisions to be made at CVP, the views of these parties should be considered hence making decision making to take longer.