Redistributed cost definition
/What is a Redistributed Cost?
A redistributed cost is a cost that has been allocated from one department to another. This situation arises when the costs of a service department (such as the IT department or the janitorial department) are charged out to other departments within a business that utilize their services. It is useful to understand these costs, since you can compare them to what it would cost to instead outsource the associated services from an outside provider. If the redistributed cost is substantially higher than the cost to outsource the same services, it may make sense to switch to the outside supplier.
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Example of Redistributed Cost
A large manufacturing company maintains a centralized IT department that is responsible for providing technological support, system maintenance, and software development across the entire organization. The total monthly operating cost of the IT department is $200,000, which includes salaries, equipment depreciation, and software licensing fees. Since the IT department is a service function that supports multiple operational departments—such as Production, Sales, and R&D—its costs must be redistributed to reflect usage. Based on a usage survey, it is determined that Production uses 50% of IT services, Sales uses 30%, and R&D uses 20%.
Accordingly, $100,000 of IT costs are allocated to the Production department, $60,000 to Sales, and $40,000 to R&D. These redistributed costs are added to each department’s expenses, ensuring that departmental budgets accurately reflect the full cost of operations, including indirect support services. This redistribution allows management to assess the total cost of each department more accurately, aids in performance evaluation, and improves cost control.