Exercise 49: Overriding the automatic cost-allocation keys

For a transformation with only one input, such as the No of DSL shelves element which connects the DSL shelf and DSLAM chassis resources, it is evident that any costs incurred by the transformation should be allocated back to its input (and in turn back to the service or services which originate the demand).

For an expression transformation with multiple inputs, an allocation of costs must be made between those inputs. By default, this allocation is made in proportion to the relative demands of those inputs; but in some cases it may be necessary or preferable to customise the allocation model. In this exercise we look at two different ways in which this can be done.

Expression transformation

In the previous exercise, we looked at Service Allocated Operating Charge for all services for costs arising from the Backhaul resource. Through the Backhaul bandwidth transformation, these costs are allocated (indirectly) to the Voice, Internet Access and Video services.

Take a moment to re-draw the chart (if you didn’t save the workspace) and examine the relevant model structure.

Cost allocation basis and proportions

The Expression transformation dialog provides a choice between allocating costs in proportion to the inputs (the default), or in simple, fixed proportions. Proportions can be used to weight the allocation if so desired.

1. Open the Input and Transformation dialog of the Backhaul bandwidth transformation (icon menu/Input and Transformation).
2. Access the Proportions Details dialog by right-clicking on the main Proportions field and selecting Details. Set the input Proportion = 0.0 for Input 2 (Internet Access).

3. Check the impact on the Service Allocated Operating Charge chart.

You should see that the amount allocated to the Internet Access service goes to zero. The other allocations are increased in proportion so that the total cost allocated remains the same.

Remember that Internet Access is bundled free with network access in this model, so associating the costs only with the revenue-generating services may be desirable in this case.

4. Go back to the Editor and set the input Cost Allocation Basis = Fixed Proportions (icon menu/Input and Transformation).
5. Re-run the model and see how the results look now.

For some non-linear expressions, a fixed allocation may be fairer than any proportional (linear) allocation.

Allocating costs according to a different measure

The main costs of network capacity tend to be in proportion to peak traffic, whereas the actual value delivered by those networks relates to volume, such as call minutes, GBytes or video minutes. We will proceed to add volume drivers to the Backhaul bandwidth transformation (without altering the expression which calculates the required capacity) so that the costs can be allocated in proportion to traffic volume rather than peak traffic.

6. Use the connection tool or drag-and-drop to define the three services Voice, Internet Access and Video as inputs 4–6 of the Backhaul bandwidth transformation, in addition to the existing (demand) inputs 1–3.
7. From the Input and Transformation dialog, set the Basis for each of these three new inputs to Annual Traffic.
8. Set the Cost Allocation Basis back to Input Proportions.
9. Set the Cost Allocation Proportion = 0.0 for inputs 1–3, and verify that Cost Allocation Proportion = 1.0 for inputs 4–6.
10. Re-run the model and check the results.

Why are the costs so skewed towards Voice? What is the problem?

11. If there is time, you could fix this by introducing an intermediate transformation to convert from Call Minutes to GBytes, or you could enter the factor directly as the Cost Allocation proportion.

Allocating costs in proportion to revenue

Alternatively, and more typically, this problem is avoided by using the economic value of the volume directly rather than the volume itself.

12. From the Expression transformation dialog, and for each of the inputs 4–6, set the Basis = Annual Revenue and re-run the model.

You should see that this more intrinsically removes Internet Access from the picture, and that more of the (total) costs are allocated to the Video service as its penetration (and revenue) increases.

Note: if your graph does not look like the one above, check your Consolidation setting.

Why does Internet Access have cost allocated when it has no revenue at all? Draw Annual Revenue graphs for the three services to find out!