The Cost Allocation Process of Information Technology Essay

The Cost Allocation Process of Information Technology - Essay Example As more firms have adopted computer software over manual functioning. Similarly, computer networks also help the departments within a firm to coordinate and communicate among themselves. With all of these advancements come costs of setting up computer networks and other related costs. Allocation of I.T costs(charging the cost to each department according to its usage of a resource) is among current hot-topic in the corporate world. According to a study done by Forrester, Computer Hardware and Network costs make up to one-third of the I.T department budget. However, the main problem is of allocating costs among various departments within a firm. The most widely used method by accountants is to allocate these costs is by dividing these costs according to the consumption by the respective department. By relative consumption, we mean that each department will be charged a share of cost according to their use. For example, if there are two departments who both use I.T network, now when at the end of fiscal year, the time for cost allocation comes, the department with more usage will be charged more and with less usage will be charged less. The fundamental reason for charging this method is to avoid multiple free-riders problems. Free-riding occurs when those who do not pay for a resource could also use the resource, so no-one is foolish enough to put up his hand and say I will pay for the resource because he knows that even if he doesn't pay for the resource he would be able to use it. For example, let's take an example from out of context here. Suppose that there is a community of fishermen is living near the sea.