Some Thoughts of How to Allocate Indirect Costs in a Corporate Environment

Abstract

The environment in which businesses operate is ever changing. The market has become global and the technological advancement has changed the way business is done. The resulting impact of globalization is fierce competition that has altered the business landscape. Firms are increasingly employing various techniques in order to remain relevant and competitive. The strategies include product differentiation, cost reduction, pricing among others. The subject of cost management is of interest to stakeholders especially the shareholders. Shareholders would maximize the wealth if revenue is maximized and cost managed properly in a firm set-up. How will managers manage costs effectively? This calls for thorough understanding of the all the costs in a business. When senior management is in a cost-cutting spree the usual culprit is the indirect costs or overheads. Indirect costs arise mainly from the support services. The support services aid the delivery of the core business of the firm. The support services include human resource management, accounting, legal, information services, procurement etc. How should indirect costs be allocated in the firm in way that will create value for the firm? The problem of allocating indirect costs is compounded in very big organizations that are scattered all over the world.

From the review of literature and empirical evidence, we find that internal markets provide a promising basis of allocating indirect costs in a corporate environment. It is not just about cost-cutting but it fundamentally changes how internal service providers view their job. However, further research can be done to explore other ways of allocating indirect costs. The chaos theory can offer a new perspective (Parker & Stacey, 1994).