The Separable Costs Remaining Benefits Method of Cost Allocation in Federal Multipurpose Projects

The separable costs-remaining benefits method for allocation of costs among the purposes of a multiple-purpose project was devised and recommended by the Federal Inter-Agency Subcommittee on Benefits and Costs in its May 1950 report on "Proposed Practices for Economic Analysis of River Basin Projects."10

The objectives of the separable costs-remaining benefits method of cost allocation are threefold.

First, to allocate to each purpose any costs which are made necessary because that purpose is included in the joint project. This is the minimum amount that should be allocated to each purpose.

Second, to allocate costs in such a way that no purpose is assigned more costs than the benefits that will result from such costs nor more than the cost of the most economical alternative way in which such benefits could be realized. This is the maximum amount that should be allocated to each purpose.

Third, between the foregoing minimum and maximum limits, the costs should be distributed among all purposes in such a way that each purpose shares equitably in any advantages of the "joint venture" as compared with alternative single-purpose plans.

The separable costs-remaining benefit method has the following steps:

First, the "separable costs" of including each purpose or function in the project are computed. This means that if a project can be built to serve three purposes for $1 million but could be built to serve only two of those purposes for $800,000, it follows that a cost of $200,000 is made necessary solely because of the third purpose and is therefore definitely assignable to that purpose and is the minimum amount that should be allocated to that purpose. By estimating the costs of various combinations of purposes, the "separable costs" of each purpose can be determined. The separable costs are sometimes

10A draft of the above description of the method was provided to the author by Ed Woodruff, Regional Economist, North Pacific Division, Corps of Engineers, Department of the Army. Mr. Woodruff is credited with writing the cost allocation instructions for the payout of the Federal multiple-purpose projects of the Columbia River Power System, which includes numerous dams and power plants on the Columbia River and its tributaries, as well as flood control and irrigation projects.

referred to as "incremental costs" since they are the same as the increase in costs required to include the function in a multiple-purpose project.

Second, the "joint costs" of the project are determined by subtracting the sum of the "separable costs" from the total multiple-purpose project costs. These "joint costs" are the cost for which an equitable distribution procedure must be found.

Third, estimates are made of the most economical alternative way in which comparable results could be realized for each purpose. For example, in a case where flood controls benefits of a million dollars annually could be realized through construction of a multiple-purpose project, it may be possible to protect the same area and realize the same benefits by construction of levees for flood control only. If the estimated cost of such levees were only $700,000, it would be uneconomical to assign to flood control more than $700,000 of the total costs of the multiple-purpose project, even though it would be economically sound to incur up to $1,000,000 in costs for flood control if a less costly means of realizing the benefits were not available. Accordingly, for each purpose of a multiple-purpose project, the amount of benefits, or the cost of the most economical alternative means of realizing the benefits, whichever is less, is a limiting figure on the total amount that should be allocated to each purpose.

Fourth, the "separable costs" for each purpose is subtracted from the limiting figure for that purpose, as determined in the preceding step. These differences are called "remaining benefits."

Fifth, the "joint costs" are then distributed among the purposes in the same proportion that the "remaining benefits" for that purpose bear to the sum of all "remaining benefits."

Finally, the total allocation to each purpose is computed by adding the separable costs and the share of joint costs for each purpose.

An illustration of the foregoing procedure is given in Table 3.2.

Table 3.2 Illustrative analysis of allocation of project costs by separable costs-remaining benefits method

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  • URHO
    How to calculate total joint cost in remaining benefit method?
    3 years ago

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