Cost Allocation for a Diversified Services Firm
Case Description
A diversified services company operates three business segments: Segment A, Segment B, and Segment C. Each generates healthy contribution margins (“Margin”) before overheads. However, the company also incurs SGD600k in Shared Expenses (e.g. rent, IT, HR, corporate functions) that must be allocated across segments.
Management asks: “Why does Segment A sometimes look highly profitable, while in other views it looks barely breaking even? How does cost allocation change the story?”
FP&A Analysis
The table below shows the budgeted figures compared to the reported actuals.
Variance Commentary & Insights
Segment A: Profits swing between SGD160k (revenue basis) and SGD100k (headcount basis). This shows A absorbs more cost when allocation follows staff count.
Segment B: Looks steady under revenue allocation (SGD108k) but pressured under headcount allocation (SGD100k). Reflects its higher staffing relative to revenue contribution.
Segment C: Appears weaker when costs follow revenue (SGD132k), but strongest under headcount (SGD200k). Indicates it is lean in staffing compared to scale.
Overall: Company profit remains at SGD400k, but the allocation logic alone drivers the “winner vs loser” perception across segments.
D. Management Implications:
The overall company profits remains constant at SGD400k, but the profitability by segment varies significantly depending on allocation basis.
Revenue-based allocation positions Segment A as the strongest performer, while headcount-based allocation shifts profitability in favour of Segment C.
This means the “winner” and “laggard” segments change depending on which lens management prefers to apply.
Guidance is required on which allocation method should be adopted consistently, so that reporting aligns with the optics and strategic priorities management wants to emphasize (e.g. scale vs efficiency).
Disclaimer
The figures, case study, and analysis presented in this document are purely illustrative and created for example purposes only. They do not represent the actual financial results, operations, or confidential information of any specific company. Any resemblance to real businesses is purely coincidental. This material is intended solely as a demonstration of financial planning and analysis concepts.