Aggregate Level Cost Method – Definition

Cite this article as:"Aggregate Level Cost Method – Definition," in The Business Professor, updated February 10, 2020, last accessed June 6, 2020, https://thebusinessprofessor.com/lesson/aggregate-level-cost-method-definition/.

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Aggregate Level Cost Method Definition

The Aggregate level cost method is a method that matches and allocates the cost and benefit of a pension plan over the span of its life. It is a form of actuarial accounting in which the present value of a pension benefit is deducted from the asset value and the excess amount spreads over future payment for participants of the pension plan.

A Little More on What is Aggregate Level Cost Method

The Actuarial Standards Board (ASB) defines the Aggregate Level Cost Method as follows;

“A method under which the excess of the actuarial present value of projected benefits of the group included in an actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit.”

The Aggregate level cost method is different from the individual level cost method given that it takes the entire participants into account and not just an individual. In this method, the cost of a pension plan is estimated as a percentage of the yearly payroll disbursed to participants. When losses or gains are recorded in a year, the percentage is adjusted to reflect these changes.

How to do aggregate level cost method

When using the aggregate level cost method to calculate the cost and benefits of pension plans, there are some steps that must be followed. These include:

  • Accounting for the total amount, total cost and time of payment of the pension plan.
  • Analysis of all benefits of the pension plan.
  • Discounting cash flows to the present value. Using the probability of payment discounts or making adjustments.
  • Applying factors of amortization to some liabilities, and others.

In general, in the aggregate level cost method, the cost of the pension plan is calculated as a percentage of the yearly payroll. This method also accounts for any actuarial gain or losses in order to adjust the annual payroll to suit the changes.

Reference for “Aggregate Level Cost Method”

https://www.investopedia.com/terms/a/aggregatelevelcostmethod.asp

https://www.mbaskool.com › Concepts › Finance and Economics

https://www.allbusiness.com/…/dictionary-aggregate-level-cost-method-4949947-1.html

https://project-management-knowledge.com/definitions/c/cost-aggregation/

https://www.derozebottel.be/feeding/…/mining-aggregate-cost-allocation-method.html

Academics research on “Aggregate Level Cost Method”

Actuarial cost methods–basics for CPAs. The impact of ERISA makes it a necessity for accountants to have a basic understanding of actuarial cost methods, Smith, J. L. (1977). Actuarial cost methods–basics for CPAs. The impact of ERISA makes it a necessity for accountants to have a basic understanding of actuarial cost methods. Journal of Accountancy (pre-1986), 143(000002), 62.

The public pension system in Taiwan: Equity issues within and between systems, Shao, A. J. (2010). The public pension system in Taiwan: Equity issues within and between systems. International Social Security Review, 63(1), 21-36. This article analyses the challenges facing the New Public Service Pension Fund System in Taiwan, China. After less than two decades of operation, this young system is facing financial imbalance and is embroiled in controversy regarding the generosity of its benefits provisions. The article first introduces Taiwan’s different systems for old‐age security, with a focus on that for general public‐sector employees. It then addresses the financial challenges facing the general public‐sector pension system, including the rising cost of its benefits for all taxpayers. Finally, a number of possible reform directions are suggested, including lowering benefit levels, making qualifying criteria more stringent, or establishing a new system. With regards to the latter, any proposed new system must seek to satisfy the goal of longer‐term financial soundness while realizing optimal fairness among all stakeholders including taxpayers.

Actuarial Cost Methods. New Pension Terminology, Melone, J. J. (1963). Actuarial Cost Methods. New Pension Terminology. The Journal of Insurance, 30(3), 456-464.

Assessing aggregate cost efficiency and the related policy implications for Greek local municipalities, Athanassopoulos, A. D., & Triantis, K. P. (1998). Assessing aggregate cost efficiency and the related policy implications for Greek local municipalities. INFOR: Information Systems and Operational Research, 36(3), 66-83. The assessment of local government performance is a major issue for a number of industrial countries since local municipalities are assuming increasingly more responsibility in terms of providing essential services to their taxpayers. In fact, the decentralisation of decision-making from central governments to local municipalities has made the measurement and evaluation of their performance critical. In this paper, a two stage methodology is proposed as a comprehensive approach to measure the performance of local municipalities. During the first stage, efficiency performance is measured using mathematical programming and econometric frontier approaches. A second stage is proposed where the impact of policy making factors on the efficiency measures obtained from the first stage is evaluated. The policy implications of cost efficiency are investigated by grouping local municipalities within clusters of similar performance characteristics and also by identifying the determinants of their cost efficiency using censored regression models. The approach is implemented by studying the performance of Greek local municipalities.

An integrated approach for modeling uncertainty in aggregate production planning, Thompson, S. D., & Davis, W. J. (1990). An integrated approach for modeling uncertainty in aggregate production planning. IEEE transactions on systems, man, and cybernetics, 20(5), 1000-1012. An integrated solution approach for studying uncertainty in the aggregate production planning problem is proposed. Procedures for evaluating and utilizing the results provided by the integrated solution approach are also presented. This modeling methodology is demonstrated on a multiple-product fixed-workforce example. The example considers three product types, three processes, and 13 planning periods. Uncertainties in selling price, cost, demand, capacity, consumption of capacity, and retention of backorders are modeled, and different capacity levels and demand trends are examined. The solutions provided by a few simplified planning strategies are evaluated and compared for two of the capacity levels. These evaluations and comparisons indicate that a simple control law could provide very robust solutions for this example.<>

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