Allocating Costs for Goal Congruence
Creative Consumer Consultants (CCC) is a corporate consulting firm with offices in New York, Chicago, Paris and Little Rock that currently assigns general costs to each office in a degree dependent on the office's contribution to net income. Managers are free to make decisions they believe to be in the best interests of the company and their specific office, and they receive bonuses based on (1) net income of the individual office and (2) sharing the profit of the company overall. The purpose here is to assess how changes in how offices are charged for general costs could positively affect goal congruence within CCC.
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As example, the Paris office has struggled in the past year but did show a profit. After applying non-traceable costs, the Paris office posted a loss of $1 million, which equated to one-third of the company's net profit for the year. If every employee in the Paris office was wholly dedicated to their jobs and their company beyond all other factors in their lives, they still would receive no recognition for making a valiant effort and laying the groundwork for future prosperity. Table 1 illustrates.
Table 1. Non-traceable Costs Assigned to Offices
Total Billings (Revenue) New York Chicago Paris Little Rock
Billings (Revenue) 50,000 22,000 10,000 16,000 2,000
Traceable Consulting Costs 33,500 14,000 6,000 12,500 1,000
Non-Traceable Consulting Costs 10,000 4,400 2,000 3,200 400
Gross Profit on Sales 6,500 3,600 2,000 300 600
Traceable Other Costs 1,000 300 200 500 0
Non-Traceable Other Costs 2,500 1,100 500 800 100
Net Income 3,000 2,200 2,200 (1,000) 500
Percent of net income 73.3 73.3 -33.3 16.7
If, on the other hand, the home office (New York) deducted all non-traceable costs directly from overall gross profit, then every office â€“ even tiny Little Rock â€“ would share in the benefits of the current year's results of the company worldwide. Non-traceable items still must be paid, but the home office can do that from corporate totals and still base monetary rewards on the same total figure of $3 million. Table 2 illustrates the changes.
Table 1. Non-traceable...