USA Cost accounting question

[Accrualworld]

Say you have a cost center where workers are not being used to their full capacity (20% time is idle). Putting aside the efficiency of this for a moment, what if someone from a different cost center wants to use one of those workers during that idle time? How would that worker's time spent in the second cost center be allocated?

If they have a time based costing formula and their costs are allocated to the second cost center it seems to have the effect of making the first cost center more profitable even though it was that manager's decision to hire in that manner. Also, the use of the worker does not bring a significant boost in revenue to the second cost center - it just makes some of the work being done more convenient, perhaps a marginal increase in quality.

If the workers in the first cost center were working to full capacity, how would the costing change (or would it)?

Thank you!

 

[DrStrangeLove]

You could set a transfer price for the internal reallocation of labor. The second cost center then "rents" the otherwise idle worker from the first cost center at that transfer price. The transfer cost shows up as revenue into the first center and as expense to the second, and matches the right labor cost to each cost center's respective revenue. And since one's revenue is the other's expense, it's a wash to the organization as a whole.

 

[Accrualworld]

You could set a transfer price for the internal reallocation of labor. The second cost center then "rents" the otherwise idle worker from the first cost center at that transfer price. The transfer cost shows up as revenue into the first center and as expense to the second, and matches the right labor cost to each cost center's respective revenue. And since one's revenue is the other's expense, it's a wash to the organization as a whole.

Thank you. Does the calculation or cost allocation or compensation arrangement change if the worker in the first cost center is working at capacity and the opportunity cost of them not working and working in the second cost center is, say, $1000 per hour. Should the second cost center have to pay the first cost center $1000 in addition to the transfer price of the worker?

 

[DrStrangeLove]

That would be decided by the two cost centers and the greater organization. There's no one way to do it; there are any number of possible transfer prices than can be justified. One place might charge a transfer price based on market prices for similar services purchased externally. Another place might set the price as the internal cost of that particular worker's labor. Opportunity cost may or may not be part of the formula.