What causes costs in our operation? How much should be charged back to the customers and producing departments? How do our costs compare with those of outsourcing firms that perform the same service?

Coursework

Over the past 10 to 15 years, companies such as Hewlett-Packard, IBM, and Dow Chemical have taken certain support departments and formed shared services centers (SSCs). The SSC performs activities that are used across a wide array of the company’s divisions and departments. Payroll, receiving, customer billing, and accounts receivable processing are examples of SSCs. The company reaps the savings from economies of scale and standardized process design. Tools to measure performance are also incorporated into the SSC design. The SSC is faced with three important cost questions:
1. What causes costs in our operation?
2. How much should be charged back to the customers and producing departments?
3. How do our costs compare with those of outsourcing firms that perform the same service?

The drivers used to develop charging rates are seldom unit-based drivers (based on production). Instead, they might include the number of transactions processed and the percentage of errors in customer-provided information. Because activity-based costing (ABC) provides a better understanding of costs and their related drivers, it provides a better framework for managing SSC costs than traditional cost accounting systems.