Boeing is one of the leading companies operating in the aviation industry. Today, the company holds one of the leading positions in the global market. Nevertheless, the company keeps working on the improvement of its organizational and financial performance to keep its competitive position in the global market. At the same time, the company needs to develop effective accounting systems and approaches, which can help the company to conduct accounting accurately. In this regard, the effective use of funds and costs of the company becomes particularly important. To put it more precisely, the company tends to use the cost allocation to improve its organizational performance and to share costs between different departments but this strategy does not always bring positive outcomes.
In actuality, Boeing performs well, although it is possible to trace certain deterioration in its performance in 2010 as its revenues have dropped compared to 2009 (See App. Table 1). At the same time, it is important to pay a particular attention to the costs the company spends and on the cost allocation in particular. As the matter of fact, Boeing views the cost allocation as the solution to its financial problems because the company stands on the ground that the cost allocation allows to share costs between different units and, therefore, improve their performance as each unit does not need to cover all costs on its own. Instead, each unit receives the support of other units, which costs are allocated to. At this point, this policy is effective in relation to units which have the highest costs of production and operations.
At first glance, this strategy is effective because the company can allocate costs between its units and ease the financial pressure on units, which have to spend high costs and conduct expansive projects. As a result, they can complete their projects and spend fewer costs due to the allocation of the costs to other units. However, in actuality, this strategy is not always effective. As the matter of fact, this strategy has a number of drawbacks and leads to the underdevelopment of some units of the company.
First of all, it is important to place emphasis on the fact that the cost allocation limits opportunities for other units. What is meant here is the fact that units that have to spend high costs do benefit from the cost allocation because costs are allocated to other units. On the other hand, units, where costs are allocated to, limit their opportunities to develop and fund their own projects because they have to share costs with other units. Therefore, they receive additional costs to cover and cannot develop their own projects, which may need more costs.
Furthermore, the policy of the costs allocation leads to the failure to stimulate cost saving within the company because units, which costs are allocated to other units, are not motivated to cut costs. They are certain that they may increase their costs more over and over again and the costs will be allocated to other units. In such a way, the units, which costs are allocated, are not interested in saving costs.
In addition, this strategy fails to link the effectiveness of performance and costs spent by the unit. In fact, units do not need to improve their performance through the effective use of funds. Instead, they just need to spend costs available and they can improve the effectiveness of their performance through the mere rise in the costs being spent.
Thus, the cost allocation has a dubious effect on the performance of Boeing because, on the one hand, the company improves performance of those units, which costs are allocated, whereas units, which have to cover the allocated costs, suffer from extensive financial pressure.
BA Key Financial Statistics. 2011.
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Travis, P. (August 2, 2004). “Present a Unified Front,” InftrmutionWeek.