University of Twente Student Theses

Cost allocation for services provided by the municipality of Hellendoorn : “What allocation model should the municipality of Hellendoorn use to allocate costs and which variables, and in which way, influence the cost price to provide services?”

Schippers, Nick (2014) Cost allocation for services provided by the municipality of Hellendoorn : “What allocation model should the municipality of Hellendoorn use to allocate costs and which variables, and in which way, influence the cost price to provide services?”.

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Abstract:	This thesis is written for the University of Twente, based on a research question given by the municipality of Hellendoorn. The reason for conducting this research is that municipalities are currently under a lot of pressure. Due to the increase of media attention given to the differences between the prices of services among municipalities and the publication of those differences, the citizens are increasingly questioning the way municipalities are pricing their services. Currently, the prices to provide services are determined by adjusting previous year’s prices with the current national inflation rate. Since the pricing of services does not involve a particular costing method, the municipality lacks insight in the attached costs to the activities necessary to provide services. The research question consists of two parts. The first part concerns selecting the right cost allocation model for the municipality of Hellendoorn, while the second part concerns the practical implementation of this model for the services provided by the municipality. The research question is formulated as follows: “What allocation model should the municipality of Hellendoorn use to allocate costs and which variables, and in which way, influence the cost price to provide services?” There are several costing models discussed in the literature. Five commonly used costing models are included in this research to decide what costing model is best applicable for the municipality of Hellendoorn. The objectives and complexity of the municipality of Hellendoorn are compared with the pros and cons of the costing models found in the literature. Based on the four most important criteria set for Hellendoorn to allocate costs, the Time-driven activity-based costing model would be preferred in comparison with the other allocation models. TDABC covers all key criteria and the cost of activities largely depends on the amount of time spend in the process. This means that ‘time’ is the key variable that drives costs. To implement the TDABC model, a proper estimation of the activity time and costs are needed. Two variables need to be determined; 1) the average department cost per minute and 2) the total activity time to render the services. Instead of surveying employees on how they spend their time, managers first directly estimate the practical capacity of the resources supplied as a percentage of the theoretical capacity (Kaplan & Anderson, 2004). An important condition is that the price set to provide services should not exceed the costs made in the process, so a break-even point should be aimed for. The price charged for services should also be in proportion to the benefits received. Besides these two conditions, the municipality should also take into account several other conditions for pricing services. When Hellendoorn implements the TDABC method according to the steps described in this research, Hellendoorn should be able to justify and explain the prices charged for their services. For activities that are difficult to estimate, Hellendoorn could be using a clocking system to determine the activity process time. The variables in the model should also be frequently updated to make sure that the activities and costs are still applicable. Any changes in costs or activities can influence the cost price of services. The TDABC model helps the Municipality of Hellendoorn to understand and justify the activity time and the costs incurred for each service (direct and overhead costs), which increases transparency towards the community and reduces the risk for potential penalties.
Item Type:	Essay (Master)
Faculty:	BMS: Behavioural, Management and Social Sciences
Subject:	88 social and public administration
Programme:	Business Administration MSc (60644)
Link to this item:	https://purl.utwente.nl/essays/64648
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