Session Plan

1. Take the survey (15/20 minutes)
2. Read two examples of a cost allocation mistake.
3. Find an example of a cost allocation error.

• Provide link to english coverage of the error.
• What costs were misallocated?
• What decision was made based on the misallocated costs?
• Total Writing: One paragraph.

SPREADSHEET ERRORS

Here’s a curated list of notable cost allocation errors from real-world financial cases, suitable for advanced managerial accounting discussions:

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High-Profile Cost Allocation Errors

1. J.P. Morgan’s “White Whale” Debacle (2012)
   • Error: Spreadsheet copy-paste errors in Value at Risk (VaR) modeling led to faulty equations, underestimating credit portfolio risks.
   • Impact: Resulted in $6.5 billion in losses and fines due to miscalculations in risk exposure ¹.
2. West Baraboo, Wisconsin Bond Error
   • Error: Missing cell in a spreadsheet caused underestimation of bond interest costs.
   • Impact: The municipality paid $400,000 more in interest than initially projected ¹.
3. Lazard’s SolarCity Valuation Mistake
   • Error: Computational spreadsheet error discounted SolarCity’s value by $400 million during Tesla’s acquisition ¹.
4. Tibco Software Shareholder Loss
   • Error: Spreadsheet error overstated Tibco’s equity value during Vista Equity Partners’ acquisition.
   • Impact: Shareholders received $100 million less than expected ¹.
5. Uber’s Driver Commission Arithmetic Error
   • Error: Misapplied 25% commission calculation (applied pre-tax instead of post-tax).
   • Impact: Cost Uber $45–50 million in driver compensation adjustments ².
6. Bank of America’s $4 Billion Loss
   • Error: Spreadsheet mishandling failed to report unrealized losses from Merrill Lynch debt sales.
   • Impact: $4 billion in hidden losses went unreported to regulators ².
7. Valeant Pharmaceuticals’ Revenue Overstatement
   • Error: Incorrect revenue recognition led to $58 million in overstated revenue.
   • Impact: Contributed to an 86% stock price plunge in 2016 amid broader accounting controversies ².
8. Groupon’s Refund Accounting Blunder
   • Error: Failed to account for customer refunds in Q4 earnings, increasing losses by $20.2 million.
   • Impact: Stock dropped 6% post-announcement; cited as a “material weakness” in internal controls ².

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Key Themes in Allocation Errors

• Spreadsheet risks: Copy-paste errors, formula flaws, and manual entry mistakes dominate high-profile cases ^{1 2}.
• Methodological inconsistencies: Inadequate recognition of reciprocal relationships (e.g., service departments) or flawed allocation bases ³.
• Regulatory and reputational risks: Errors often lead to fines, investor distrust, and operational inefficiencies ⁴.

For deeper analysis, explore reciprocal vs. step/direct methods in cost allocation ³, and compare spreadsheet-driven errors ^{1 2} with methodological inconsistencies ⁴.

https://hbr.org/2011/10/a-kodak-moment-to-reconsider-t