Case 055Budgeting, variance and reportingWarm up
Brenholt Industries' Pune finance GCC costs Rs 60 crore a year and serves three business units. Compare allocating the cost by headcount and by transactions, and recommend a basis.
1The situation
Brenholt Industries runs a finance global capability centre in Pune that handles invoices, payments, collections, ledger closing and reporting for its three business units. The centre costs Rs 60 crore a year. Today the cost is charged out by business unit headcount.
Industrial has 2,000 staff and generates 30,000 finance transactions a year. Consumer has 1,000 staff and 90,000 transactions, because it bills thousands of small retailers. Services has 1,000 staff and 30,000 transactions. The Industrial head has complained that his unit pays for work it does not use.
2Your task
Allocate the Rs 60 crore by headcount and by transactions, explain the difference, and recommend the basis the controller should use.
Quick check
Moving from headcount to transactions, what happens to Consumer's charge?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
By headcount Industrial pays Rs 30 crore and Consumer Rs 15 crore; by transactions Industrial pays Rs 12 crore and Consumer Rs 36 crore. Consumer drives 60% of the work but carries 25% of the cost today, so Industrial subsidises it by Rs 18 crore. Charge the transaction-processing cost on transactions and the smaller reporting cost on headcount or revenue, so each unit pays for what it causes.
Step 1Why does the allocation basis matter at all, if the total is fixed?
Because the total is fixed but the decisions are not. An allocation tells each business unit what the shared service costs it, and units decide pricing, staffing and whether to outsource on that number. Think of four flatmates splitting an electricity bill equally when one runs an air conditioner all night: the bill is the same, but the light user is paying for the heavy user, and the heavy user has no reason to switch anything off. A cost driverThe activity that actually causes a cost to rise or fall, such as the number of invoices processed for an accounts payable team. is the thing that makes the bill go up.
Step 2What does each basis charge?
By headcount, the Rs 60 crore spread over 4,000 staff is Rs 1.5 lakh a head: Industrial Rs 30 crore, Consumer Rs 15 crore, Services Rs 15 crore. By transactions, Rs 60 crore over 1,50,000 transactions is Rs 4,000 each: Industrial Rs 12 crore, Consumer Rs 36 crore, Services Rs 12 crore. Consumer's charge rises from Rs 15 crore to Rs 36 crore and Industrial's falls from Rs 30 crore to Rs 12 crore, because Consumer creates 60% of the work with 25% of the people.
| Business unit | Staff | Transactions | By headcount | By transactions | 70/30 hybrid |
|---|---|---|---|---|---|
| Industrial | 2,000 | 30,000 | 30.0 | 12.0 | 17.4 |
| Consumer | 1,000 | 90,000 | 15.0 | 36.0 | 29.7 |
| Services | 1,000 | 30,000 | 15.0 | 12.0 | 12.9 |
| Total | 4,000 | 1,50,000 | 60.0 | 60.0 | 60.0 |
Step 3So which basis would you recommend?
Neither in pure form. Split the centre's cost into pools by what drives each one. Invoice processing, payments and collections scale with transactions; month-end close and management reporting scale more with the size and complexity of the unit. If, say, 70% of the cost sits in transaction teams, charge that on transactions and the rest on headcount or revenue. Consumer then pays about Rs 29.7 crore, Industrial Rs 17.4 crore and Services Rs 12.9 crore. This is a simple form of activity-based costingAssigning shared costs to products or units in proportion to the activities they consume, rather than by a broad average such as headcount or revenue., and it gives Consumer a reason to cut transactions, for example by billing small retailers monthly instead of per delivery.
Step 4What would make you change the recommendation?
Three things to check before rolling it out. First, whether all transactions cost the same: a complex intercompany entry may take ten times as long as a retail receipt, so weighted transactions may be fairer. Second, whether the count is easy to game or argue about; a basis nobody trusts creates monthly disputes that cost more than the distortion it fixes. Third, phasing: Consumer's charge more than doubles, so a one-year transition with the change shown alongside the old figure avoids a sudden hit to its reported profit. Allocation is a management signal, not an accounting truth, so the right basis is the one that changes behaviour in the direction the company wants.
Where candidates lose it
The common miss is defending headcount because it is easy to measure and stable. Easy is not the test; a basis that ignores what drives the work makes Industrial look less profitable than it is and Consumer more profitable, and pricing decisions follow the wrong numbers.
The second is recommending transactions for the whole cost, which overcharges for reporting work that does not grow with invoice volume.
What the interviewer asks next
- Consumer threatens to outsource its invoice processing at Rs 3,000 a transaction. How do you respond?
- Which other drivers could you use for the reporting pool, and what does each reward?
- How would you allocate the GCC's fixed building and technology cost?
Company names and figures are illustrative.