103 10.5 Summary of Service Department Cost Allocation Methods and Dysfunctional Incentives (unintended consequences)

Dysfunctional Incentives from Service Department Cost Allocations:

The incentives that service department cost allocations impose on managers and employees should be carefully considered. In some cases, these allocations have unintended and undesirable consequences. For example:

  1. At one university, professors are “charged” for office telephone usage, which includes a fixed monthly fee similar to the flat fee that is charged for residential telephone service. The “charge” comes out of the professor’s “research allowance,” which can otherwise be used for professional expenses such as journal subscriptions, professional organization dues, and travel to conferences. Since the flat fee (as opposed to the long distance charges) is unavoidable, it does not affect the professors’ behavior, but it is viewed negatively, because the research allowance is effectively several hundred dollars a year less than “advertised” by the administration.
  2. At another university, state-of-the-art computer equipment in the classrooms is purchased out of student fees. Consequently, this equipment is readily available and “free” to the faculty when they teach. However, when a professor reserves a room for a non-teaching purpose, such as a research presentation to fellow faculty, the Instructional Technology service center “charges” the professor’s department approximately $50 to use the equipment, which is far in excess of the equipment’s marginal cost (the depreciation on the bulb in the projector). The $50 charge is sufficient to dissuade many departments from using the equipment for non-instructional purposes, so the equipment sits idle, and the professors use a “low tech” solution: an overhead projector and transparencies.


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Cost Accounting Copyright © 2023 by William (Bill) Bonner is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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