Calculate Resource Use Rates

This is the process that sets the rate to be charged for each resource. It is a very straightforward step that consists simply of dividing the number of dollars in each cost pool (from Step 4) by the use level for the particular resource (from Step 3).

In this example, the annual resource use levels set in Table 7-3 are divided by the dollars allocated each cost pool in Table 7-4. The rate calculations are shown in Table 7-5.

Table 7·4. Cost Pool Allocations

1 Computer operations salaries and benefits split among CPU, print, and hardware overhead pools, based on analysis of duties.

2Hardware expense allocated to pools based on actual equipment assigned each pool.

3Hardware maintenance proportionate to hardware expense.

4A11 software allocated to CPU pool.

5Hardware overhead allocated as follows: 60% CPU; 10% tape; 10% disk; 20% print (arbitrary).

6General overhead allocated as follows: 40% programmer/analyst; 20% data entry; 24% CPU; 4% tape;

4% disk; 8% print (arbRrary).

Table 7-5. Rate CalculatIons

CPU $ 725,168

= $345.321hr 2,100

Tape $ 155,028 = $0.25/1,000 lias

620 x 10

Disk $ 221,028

= $0.28/1,000 lias 800 x 10

Print $ 454,056

= $0.9111,000 lines 500x10

Data Entry $ 335,190

= $9.58/hr 35,000

Programmer/Analyst $1,014,830

= $24.16/hr 42,000

Step 6: Select Either Resource or Unit Costing as Chargeback Approach

The resource method consists of measuring the resources employed by each user and computing the bill, using the rate established for each resource. The user thus receives a bill along the following lines:

1.46 CPU hrs @ $345.32 6.81 Mi Disk 1/0s @ $0.28

$504.17

$190.68

To many users, such a bill is meaningless and undesirable. Many prefer units that they themselves can measure (to keep DP honest) and for which they can predict volume (useful in budgeting for DP services expenses).

Charging on the basis of item produced or processed (such as number of payroll checks, invoices produced, policies written, or account inquiries) rather than on the basis of resources used is the alternative approach. This approach, called unit costing or standard costing, is described in Step 7.

A combination of the two approaches can be used. For some users or systems, one method may be preferable. As long as the objectives of the chargeback system are met, either approach to calculating a charge for services, if agreed to by user and provider, is acceptable.

Step 7: Develop Unit Rates for Applications Using Unit Costing This step is optional and is of interest only if the unit costing approach to recovery, defined in Step 6, is to be used.

The objective of the unit costing approach is to recover the same number of dollars that would be recovered using the resource approach but to do it using

chargeable items other than resources used. The amount of the bill is not at issue but, rather, the manner in which it is calculated. Some creative cost accounting is therefore in order. The following steps will accomplish it.

Decide Which Units to Use. This requires a careful look at the application system to discover units that are meaningful to the user and easily countable and for which change in resource use is somewhat directly proportionate to change in the unit count. In the trust business, for example, a workable unit is the number of accounts being serviced or processed. While the amount of process-ing performed is to a great degree dependent on the number of transactions processed, the relationship between accounts and transactions proves to be nearly constant over a somewhat stable group of accounts. Therefore, sufficient correlation between number of accounts and resource use costs exists to use number of accounts as the unit of measure. Furthermore, number of accounts is preferable to number of transactions because it is easier to count and simpler for the user to understand and to predict in advance. More than one unit of measurement may be required to sufficiently express processing costs in meaningful application units. For example, the amount of processing for the application might be highly dependent on both transaction count and number of statements produced. In this case, both items should be used as chargeable units.

Establish the Relationship between Number of Units and Resource Cost over a Period of Several Months. Several readings must be taken to set a unit rate. The objective is to recover the same amount by the unit method as would have resulted from the resource method. Table 7-6 is an example, using just a single unit.

Table 7-6. Average Units and Resource Costs

Resource Cost

Month No. of Accounts $

1 5,625 18,721

2 5,700 19,085

3 5,683 18,610

4 5,528 18,302

5 5,632 19,468

Avg 5,634 18,837

Calculate the Unit Rate. Divide the average resource cost by the average number of units. In this example, the average number of units is 5,634, and the average resource cost is $18,837. The average unit cost is therefore $3.34.

When using multiple units, establishing the correlation is more difficult, requires more data samples, and is subject to more trial and error.

Validate the Selection of Unit and Rate Calculation. Taking each of the five months in the sample, the results using the calculated rate are shown in Table 7-7.

Table 7-7. Rate Calculations Using Resource Cost and Unit Cost Resource Cost Unit Cost

Month No. of Accounts $ (@ $3.34) % Difference

1 5,625 18,721 18,788 +0.36

2 5,700 19,085 19,038 -0.25

3 5,638 18,610 18,981 + 1.99

4 5,528 18,302 18,463 +0.88

5 5,632 19,468 18,811 -3.37

94,186 94,081 -0.11

In this example, the correlation is excellent. The deviation each month is very small and the total result almost exact. Such precise results will seldom be obtained, and they need not be this good to be workable. A little practice will show whether a proper unit has been chosen.