Accounting and Control

Tidal Cloud: Cost Allocation in the Cloud - Teaching Note

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This case uses a contemporaneous setting to introduce core managerial accounting concepts related to cost allocation, cost systems, activity-based costing and cost analysis for strategic decision making. The case is set in July of 2016 with Tidal Cloud, a late-stage startup with three products that differentially consume indirect costs of the company. Tidal has benefited from a period of high growth and the potential of a lucrative exit is on everyone's mind. But, with the emergence of AWS and other cloud competitors it is increasing difficult to sustain the growth of recent years and achieve the profitability metrics acquirers are looking for. In particular, the management team is struggling both to develop an appropriate response to recent competitor actions and to update its strategic plan going forward. This process is complicated by an outdated cost system that distorts the relative performance of Tidal's three products.
Bibliographic citation: RANEY, R. (2022). Tidal Cloud: Cost Allocation in the Cloud - Teaching Note. IESE, CT-38-E.
Date: 01/09/2022
Author(s): Robert Raney
Document type: Teaching Note
Department: Accounting and Control
Languages: English
Year of the events: 2016
Geographic area: United States
Learning objective The class can be divided into three parts with specific learning objectives. First, analysis of the existing cost system, which forces students to question the processes and assumptions embedded in financial reports that they likely have just accepted at face value in the past. This will give rise to a discussion about direct costs vs. indirect costs and allow the professor to introduce the main elements of a cost system (cost objects, costs pools, allocation base or cost driver, and allocation rate or percentage). It will also facilitate learning the calculations and assumptions necessary to allocate indirect costs. The class can then progress to considering improvements to the existing cost system. The case specifically asks students to complete the calculations for (1) a basic cost system with a second cost pool and (2) an activity-based cost (ABC) system. Discussion here can include how to decide on cost pools and cost drivers, where to focus efforts when designing a cost system, the costs and benefits to changing a cost system, and the difference between a traditional cost system and an ABC system. The professor may also choose to discuss ideas for improving the costs system beyond the ABC system introduced in the case. Third, throughout the previous two parts, the professor can encourage students to make strategic recommendations regarding how Tidal should respond to the recent price drop by a competitor and what the longer-term strategic focus and specific actions of the company should be. Students' opinions on the best way to execute its strategic focus for the three products generally changes significantly with the different costs systems and perspectives of financial performance. Discussing this helps students learn the importance of having an accurate perspective of profitability and of questioning the cost system currently used in financial reporting for their businesses.