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One of the most important factors for the success of a profit-making manufacturing or service organization is its ability to determine accurately the costs of the products or services that it markets. Such costing information is the basis of product pricing as well as the foundation for evaluating the performance of the organization. The philosophy behind the running of a profit-oriented organization should be applicable to a businesslike IS organization. It, too, should use valid cost accounting principles in determining and distributing the data processing costs to the users of its services. The service (or "product") of the IS organization is the output of information as produced from raw data supplied by the user, within a time-frame acceptable to the user. Using generally accepted cost accounting disciplines will produce: o Data processing costs that can be properly assigned to each IS cost center (that is, user), enabling users to improve their management of data processing expenditures. o Summarized costs permitting upper management to evaluate and plan the activities of the IS organization more effectively. The major problem in establishing effective cost accounting procedures is applying cost accounting to a heterogeneous set of services. In an IS organization there are many different services in addition to computer processing services that are chargeable to the user. In fact, cost categories such as technical personnel, special forms, tape reel storage, reference manuals, technical education, and software acquisition may comprise the major portion of the overall data processing costs. Thus, each resource category should be individually costed and charged out accordingly. To include the costs of these other resources in the overhead to computer processing costs results in an inequitable cost distribution system and, more importantly, fails to provide true "responsibility accounting." Responsibility accounting itemizes the data processing charges to the responsible user for each data processing service. Users know exactly where the money is spent, and can become more conscious of their computer and data processing resource utilization. This procedure provides both user and IS management with an accurate picture of how their data processing costs have been distributed, thereby permitting the type of priority decision making that characterizes effective management. Conventional cost accounting systems are normally defined as being either process cost or job order cost systems. The process cost system is normally associated with the automated assembly line operation and is typified by the production of a single product as part of a continuous process, such as the manufacture of an automobile engine. This type of cost accounting system does not meet the requirements for the IS organization. According to Patrick S. Kemp on pages 107 and 108 of Accounting for the Manager, published by Dow Jones-Irwin, Inc., 1970, the job order cost system is used for a job shop environment that produces many special products of a heterogeneous nature. This cost system has a structure that is applicable to the costing of data processing resource usage. On pages 106 and 107 of the same book, Mr. Kemp identifies three ingredients used in job order cost systems to arrive at product costs: direct materials, direct labor, and manufacturing overhead. Materials and labor are called direct if the costs of the items can be directly associated with the cost of the final product. All other costs, normally termed indirect costs, are considered to be overhead and cannot be associated directly with the cost of a product. This structure is only partially valid for data processing costing. Like manufacturing, data processing costing relies on direct materials, direct labor, and overhead. However, because of the method of costing the computer equipment used, data processing uses a fourth cost category. In manufacturing, the actual equipment cost cannot be easily associated with the cost of a product and is normally considered as an overhead item. In data processing costing, the equipment usage can be directly measured and is associated with the end service. Therefore, the fourth cost category, direct hardware costs, is used in the data processing costing structure. In summary, the data processing costing system should have four categories of cost: direct hardware, direct labor, direct materials, and data processing overhead.
This section contains the following topics:
3.2 Load Center Cost Determination
3.3 Direct and Indirect Classification
3.5 Indirect Cost Application Methods
3.6 Pricing Strategy Selection
3.7 Determining Billable Rates
3.8 Periodic Variance Analysis
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