Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 22

Federal Reserve Banks; Cost Allocation The Monetary Control Act of 1980 www.federal reserve.gov/payment systems/pricing/pricingpol.htm) requires the Federal Reserve (FED) to charge explic­itly for certain services, in effect placing Federal Reserve banks in direct competition with large com­mercial banks for these services. The act also requires the FED to price these services based on full cost, including allocated indirect costs. Recent research indicates that the FED responded to the act by both improving the efficiency with which it provides these services and reallocating indirect costs to the less price-competitive services.

Required Describe briefly how the allocation of indirect costs could have made the FED?s most pricesensitive services more competitive. Are there ethical or professional issues involved in this case?

Step 1 of 3

Indirect Cost Allocation:

Cost allocation means to allocate overhead expenses on the basis of cost objects. Cost allocation can be done for product wise, department wise etc.

Cost allocation is mainly used in manufacturing concern but it is equally importance in service as well as not for profit Sector.