Cost allocation (allocate pay across places)

  • Thread starter fusion1920
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In summary, the problem at hand is allocating pay for multiple people across multiple locations, while minimizing the absolute difference between the allocated hours for each person in each location. The total amount of hours available is 160, and the total amount of dollars allocated is $125,000. The solution must also meet the constraint of allocating $50,000 to Place01 and $75,000 to Place02. This problem can be solved using the Simplex Method, which involves creating a matrix and solving for the optimal solution that evenly distributes the hours for each employee across the two places. The solution must also be scalable for a larger number of places and people.
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fusion1920
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I have business problem that I need to address. In short, I need to allocate pay for multiple people across multiple locations. For the purpose of providing a simple example, I restricted my thoughts to two people and two places.

Given:

Let a = Hours to allocate to Place01 for Sue
Let b = Hours to allocate to Place02 for Sue
Let c = Hours to allocate to Place01 for Bob
Let d = Hours to allocate to Place02 for Bob

Bob's Hourly rate = 500 dollars/hour
Sue's Hourly rate = 1000 dollars/hour
Bob's Hours worked = 70 Hours
Sue's Hours worked= 90 Hours

The following must be true in any reasonable solution:
a>0
b>0
c>0
d>0

1000*a + 500*c = $50,000 where 1000 represents Sue's hourly rate and 500 represents Bob's hourly rate.
1000*b + 500*d = $75,000 where 1000 represents Sue's hourly rate and 500 represents Bob's hourly rate.
c+d = 70 hours
a+b = 90 hours

The Problem

I need to distribute the 160 total hours as evenly as possible across Place01 and Place02 for each Person. Thus, in math terms I would like to minimize the absolute difference between a and b. I would also like to minimize the absolute difference between c and d subject to the constraints listed above.
e.g. I want to select the solution from the universe of possible solutions such that:
|a-b| is at a minimum and |c-d| is also minimized

Notice that the total dollars allocated $125,000 = total dollars paid = $125,000. Normally, to do this I would just split the hours for each person between each place. But as noted above, I now have the constraint that Place01 must get exactly $50,000 allocated and place two must get $75,000. How can I solve this in the best way possible that distributes the hours as evenly as possible for each employee across the two Places? Bear in mind that the solution will need to be scalable in the sense that I actually have about 100 places and as many people. Rates and hours for each person are known in advance and are constant. I simplified the example for the purpose of illustrating the problem at hand.

I first attempted to solve this using a matrix, but then realized I did not understand how to even out the allocation.

Thanks in advance!
 
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  • #2
Here is a step by step example how to solve these kind of problems:
https://www.avon-schools.org/cms/lib/IN01001885/Centricity/Domain/3488/FB%20Ch%204%20Notes%20-%20Simplex%20Method.pdf
 

Related to Cost allocation (allocate pay across places)

1. What is cost allocation?

Cost allocation is the process of dividing and assigning costs to various departments, projects, or activities within an organization. It helps to determine how much each division or project contributes to the overall cost of the organization.

2. Why is cost allocation important?

Cost allocation is important because it allows organizations to accurately track and allocate costs, which helps in decision making and performance evaluation. It also ensures that each department or project is accountable for its share of costs.

3. What are the different methods of cost allocation?

The most commonly used methods of cost allocation include direct allocation, step-down allocation, and activity-based allocation. Direct allocation involves directly assigning costs to a specific department or project. Step-down allocation involves allocating costs from one department to another, based on their level of usage. Activity-based allocation allocates costs based on the specific activities or resources used.

4. How is cost allocation different from cost apportionment?

While cost allocation involves dividing costs among different departments or projects, cost apportionment involves dividing costs among different cost centers or units within a department. Cost allocation focuses on the contribution of each department or project to the overall cost, while cost apportionment focuses on the distribution of costs within a department.

5. What are some challenges in cost allocation?

Some challenges in cost allocation include determining the most appropriate method for allocation, ensuring fairness and accuracy in the allocation process, and dealing with costs that cannot be easily allocated to a specific department or project. Additionally, changes in organizational structure or activities can also make cost allocation more complex and challenging.

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