Allocating overhead costs in a Navy Working Capital Fund environment : an analysis and comparison of current Navy policy and private sector practice

Abstract

This thesis was developed in response to Naval Air Warfare Aircraft Division (NAWCAD) management's desire to explore alternative overhead allocation practices in order to better understand their organization's cost relationships and more equitably charge their customers. The Defense Reform initiative challenges Department of Defense organizations to adopt those business practices that American industry has successfully used to become leaner and more flexible. The objective of this thesis was to evaluate the overhead allocation practices of five private sector organizations for the potential improvement of overhead allocation practices in Navy Working Capital Fund activities. Interviews with private sector managers were used to develop a process schematic that represents the common overhead allocation practices in the private sector organizations. The process schematic was then used to compare and contrast the overhead allocation practices in the private sector with the allocation practices currently used in NWCF activities. Finally, the allocation schematic was used to describe an overhead allocation method for NAWCAD based on private sector practice. This study found that a proposal by NAWCAD managers to reform their overhead allocation method should result in more equitable customer billing. Potential exists to improve Navy allocation practices by moving even closer to private sector practice.