Allocation bases

An allocation base is the basis on which Cost accounting allocates overhead costs. An allocation base can be a quantity, such as machine hours that are used, kilowatt hours (kWh) that are consumed, or square footage that is occupied. Allocation bases are mostly used to assign overhead costs to inventory that is produced. For example, an IT department allocates its expenses according to the number of computers that each department uses.

There are three types of allocation bases in Cost accounting:

  • Predefined dimension member allocation bases
  • Hierarchy allocation bases
  • Formula allocation bases

Predefined dimension member allocation bases

The predefined dimension member allocation bases are created automatically when a dimension member of one the following types is created:

  • Statistical dimension members
  • Cost element dimension members

Note

The predefined dimension member allocation bases that are based on a cost element dimension member consider the values only from the data source provider, such as the general ledger or budget.

Example 1: Use a cost element dimension member as the allocation base

This example shows how to create a cost allocation rule to allocate cost element 10002 (Employee insurance) to the balance that is recorded on cost element 10001 (Salaries). The allocation rule is defined based on the ratio of each department's salaries to total salaries. (Review needed!)

In the general ledger, the chart of account is defined as follows.

Chart of account Main account Description Main account type
Shared 10001 Salaries Expense
Shared 10002 Employee insurance Expense

Define a cost element dimension, and configure the data connector. After the data is imported, the following entries are created in Cost accounting.

Cost element dimension members

Cost element dimension name Cost element Description Type
Cost elements 10001 Salaries Primary
Cost elements 10002 Employee insurance Primary

Predefined dimension member allocation bases

Name Description Cost element dimension
10001 Salaries Cost elements
10002 Employee insurance Cost elements

In the general ledger, the following entries have been posted:

  • The entries that show the Salaries main account come from the Payroll system and are posted to cost centers.
  • The expense for employee insurance is manually posted to a default cost center.
Accounting date Cost center Description Main account Description Amount in accounting currency
03-01-2017 CC001 HR 10001 Salaries 2,000.00
03-01-2017 CC002 FI 10001 Salaries 5,000.00
03-01-2017 CC003 IT 10001 Salaries 3,000.00
03-01-2017 CC099 Default cost center 10002 Employee insurance 1,000.00

After the general ledger source data is processed, the following entries are created in Cost accounting.

Cost entries

Cost object Description Cost element Description Cost behavior Amount Accounting date
CC001 HR 10001 Salaries Unclassified 2,000.00 03-01-2017
CC002 FI 10001 Salaries Unclassified 5,000.00 03-01-2017
CC003 IT 10001 Salaries Unclassified 3,000.00 03-01-2017
CC099 Default cost center 10002 Employee insurance Unclassified 1,000.00 03-01-2017

In this simplified example, a cost allocation rule is created to allocate cost element 10002 (Employee insurance) relative to the balance that is recorded on cost element 10001 (Salaries).

Cost distribution rule

Cost object dimension hierarchy node Cost element dimension hierarchy node Cost behavior Allocation base
CC099 10002 Unclassified 10001

Perform overhead calculation

After cost element 10001 (Salaries) is applied as the allocation base, the result of the overhead calculation is as follows.

Cost object Description Magnitude Allocation factor Amount
CC001 HR 2,000 (2,000 ÷ 10,000) × 1,000.00 200.00
CC002 FI 5,000 (5,000 ÷ 10,000) × 1,000.00 500.00
CC003 IT 3,000 (3,000 ÷ 10,000) × 1,000.00 300.00

Journal

Journal Journal type Fiscal calendar period Year Period Version
00001 Cost distribution calculation journal Fiscal 2017 Period 1 Overhead calculation / 01-02-2017 11:51:00 PM / Ledger /2017 / Period 1

Cost object balance journal entries

Accounting date Cost object Description Cost element Description Cost behavior Amount
31-01-2017 CC099 Default cost center 10002 Employee insurance Unclassified 1,000.00

Cost entries

Cost object Description Cost element Description Cost behavior Amount Accounting date
CC099 Default cost center 10002 Employee insurance Unclassified -1,000.00 31-01-2017
CC001 HR 10002 Employee insurance Unclassified 200.00 31-01-2017
CC002 FI 10002 Employee insurance Unclassified 500.00 31-01-2017
CC099 IT 10002 Employee insurance Unclassified 300.00 31-01-2017

Example 2: Use a statistical dimension member as the allocation base

Statistical dimension members can be used as allocation bases to define policies or report non-monetary consumption by cost objects. You can manually create statistical dimension members or import them from a file by using the Data management import/export tool.

Statistical dimension members

Statistical dimension name Statistical element Description Unit
Statistical elements FTE Full time employees Ea
Statistical elements Electricity Electricity consumption kWh

When a statistical dimension member is saved, a corresponding record is created in the predefined dimension member allocation bases.

Predefined dimension member allocation bases

Name Description Statistical element dimension
FTE Full time employees Statistical elements
Electricity Electricity consumption Statistical elements

Statistical measures can come from various sources:

  • Electricity consumption can be measured by meters that are installed in different areas of the company.
  • Tables hold statistical measures. For example, the HcmEmployment table holds a list of all employees and the cost centers that they work for.
Name Cost center Description Worker type
Employee A CC001 HR Employee
Employee B CC002 FI Employee
Employee C CC002 FI Employee
Employee D CC003 IT Employee
Employee F CC003 IT Employee

Note

All the tables that contain financial dimensions can be used as sources for statistical measures.

Cost accounting supports a collection of statistical measures by using the following data connections:

  • Data management import/export tool
  • Statistical measures

To pull statistical measures from the system, a statistical measure provider template is required. For more information, see Statistical measure provider template. (Will add a link once this topic is written.)

Statistical measure provider templates

Name Function Source table Sum field Date field
FTE’s Count HcmEmployment Not applicable Not applicable

After the statistical measure source data is processed, the following entries will be created in Cost accounting.

Statistical entries

Cost object Description Accounting date Statistical dimension member Description Magnitude
CC001 HR 31-01-2017 FTE’s Full time employees 1.00
CC002 FI 31-01-2017 FTE’s Full time employees 2.00
CC003 IT 31-01-2017 FTE’s Full time employees 2.00

Here is an example of a cost distribution rule if the FTE’s predefined dimension member allocation basis is assigned as the allocation base in it.

Cost object Description Magnitude Allocation factor
CC001 HR 1.00 (1/5) × Amount
CC002 FI 2.00 (2/5) × Amount
CC003 IT 2.00 (2/5) × Amount

You can use the Imported statistical measures data entity to import statistical measures into Cost accounting. You can also use the Data management import/export tool. In Excel, the consumption of electricity is recorded as follows.

Accounting date Dimension member Magnitude Source identifier
31-01-2017 CC001 2,450.00 Electricity
31-01-2017 CC002 4,100.00 Electricity
31-01-2017 CC003 15,000.00 Electricity

After the statistical measure source data is processed, the following entries will be created in Cost accounting.

Statistical entries

Cost object Accounting date Statistical dimension member Description Magnitude
CC001 HR 31-01-2017 Electricity Electricity consumption 2,450.00
CC002 FI 31-01-2017 Electricity Electricity consumption 4,100.00
CC003 IT 31-01-2017 Electricity Electricity consumption 15,000.00

Here is an example of a cost distribution rule if the Electricity predefined dimension member allocation basis is assigned as the allocation base in it.

Cost object Description Magnitude Allocation factor
CC001 HR 2,450.00 (2,450 ÷ 21,550) × Amount
CC002 FI 4,100.00 (4,100 ÷ 21,550) × Amount
CC003 IT 15,000.00 (15,000 ÷ 21,550) × Amount

Hierarchy allocation bases

Cost accountants can manually create the hierarchy allocation bases by applying a cost object dimension hierarchy node to an existing allocation base. In this way, you can limit the range of the original predefined dimension member allocation basis. One predefined dimension member allocation basis can be used to create several hierarchy allocation bases. Ranges can be maintained in the cost object dimension hierarchy that is associated with the hierarchy allocation bases.

Example: Hierarchy allocation bases that are based on full-time employees in the organization

Here is an example of a cost object dimension hierarchy that can be created to describe a simplified organization.

Hierarchy name Node level 0 Node level 1 Node level 2 Dimension members
Organization CEO CFO FICO CC001
Organization CEO CFO HR CC002
Organization CEO CIO IT CC003

The FTE’s predefined dimension member allocation basis that was created in the previous section holds the following entries.

Statistical entries

Cost object Description Accounting date Statistical dimension member Description Magnitude
CC001 HR 31-01-2017 FTE’s Full time employees 1.00
CC002 FI 31-01-2017 FTE’s Full time employees 2.00
CC003 IT 31-01-2017 FTE’s Full time employees 2.00

A cost must be distributed between cost centers that report to the organization's chief financial officer (CFO). It's acknowledged that the correct allocation ratio is the number of full-time employees (FTEs) by cost center.

Hierarchy allocation bases

Name Allocation base Cost object dimension hierarchy Cost object dimension hierarchy node
Number of FTEs in CFO FTE’s Organization CFO

A Preview function lets you validate the hierarchy allocation basis that is created, based on statistical entries in the system.

Allocation base details

Cost object Description Magnitude
CC001 HR 1.00
CC002 FI 2.00

Here is an example of a cost distribution rule if the Number of FTEs in CFO hierarchy allocation basis is assigned as the allocation base in it.

Cost object Description Magnitude Allocation factor
CC001 HR 1.00 (1/3) × Amount
CC002 FI 2.00 (2/3) × Amount

Formula allocation bases

Formula allocation bases let you define advanced formulas to achieve the correct allocation basis. You can manually create formula allocation bases.

When you create a formula allocation base, you select which statistical dimension and cost element dimension should be the basis for the formula. All allocation bases that come from the previously selected dimensions can be used in a formula allocation base.

Note

Previously defined formula allocation bases can be used to define a new formula allocation base.

In formula allocation base factors, you create an alias, and associate it with either an allocation base or a constant. The aliases are then used to define the formula.

You can use the following operators to define your formula.

Symbols Text
( ) Parentheses
< Smaller than
> Larger than
+ Addition
Subtraction
* Multiplication

Traditional IF statements aren't supported. However, you can create statements and validate whether they are true.

Statement Validation Result
a > b True 1
a > b False 0

Example 1: A simple formula

Electricity bills often consist of two parts:

  • A fixed fee for being connected to grid
  • A cost that is associated with consumption per kWh

The Electricity predefined dimension member allocation basis has already been defined and holds these values.

Statistical entries

Cost object Name Accounting date Statistical dimension member Description Magnitude
CC001 HR 31-01-2017 Electricity Electricity consumption 2,450.00
CC002 FI 31-01-2017 Electricity Electricity consumption 4,100.00
CC003 IT 31-01-2017 Electricity Electricity consumption 15,000.00

If the fixed fee must now be evenly spread over cost objects that consume electricity, you have two options for allocating the costs:

  • Create a new predefined allocation base, Electricity fixed, and then apply a statistical measure of 1.00 for each cost object that consumed electricity.
  • Create a formula allocation base, Electricity fixed, that takes advantage of the Electricity predefined allocation base that is already defined in the system. The benefit of this option is that data must be loaded into Cost accounting for only one Electricity statistical dimension member.

Formula allocation base

Name Cost element dimension Statistical dimension Formula
Electricity fixed Statistical elements

Before the Formula field can be filled, you must specify the alias that should be used in the formula.

Formula allocation base factors

Alias Constant Allocation base
a Electricity
b 0.01

Note that 0 (zero) isn't supported as a constant.

Formula allocation base

Name Cost element dimension Statistical dimension Formula
Electricity fixed Statistical elements a > b

A Preview function lets you validate the formula allocation base that is created, based on statistical entries in the system.

Allocation base details

Cost object Description Formula Magnitude
CC001 HR 2,450.00 > 0.01 1.00
CC002 FI 4,100.00 > 0.01 1.00
CC003 IT 15,000.00 > 0.01 1.00

Here is an example of a cost distribution rule if the Electricity formula allocation base is assigned as the allocation base in it.

Cost object magnitude allocation factor

Cost object Name Magnitude Allocation factor
CC001 HR 1.00 (1/3) × Amount
CC002 FI 1.00 (1/3) × Amount
CC003 IT 1.00 (1/3) × Amount

Example 2: An advanced formula

For this example, the cost of electricity should not just follow the actual electricity that is consumed in kWh. Management wants to incorporate incentive for lowering electricity usage.

Rule Rate
a <= 10000,00 kWh 0.75
a > 10000,00 kWh 1.15

A new formula allocation base, Electricity usage, is created.

Formula allocation base

Name Cost element dimension Statistical dimension Formula
Electricity usage Statistical elements

Before the Formula field can be filled, you must specify the alias that should be used in the formula.

Formula allocation base factors

Alias Constant Allocation base
a Electricity
b 10,000.00
c 0.75
d 1.15

Formula allocation base

Name Cost element dimension Statistical dimension Formula
Electricity fixed Statistical elements ((a > b) × ((b × c) + (a – b) × d)) + ((a <= b] × a × c)

A Preview function lets you validate the formula allocation base that is created, based on statistical entries in the system.

Allocation base details

Cost object Formula Magnitude
CC001 HR ((2,450.00 > 10.000.00) × ((10,000.00 × 0.75) + (2,450.00 – 10,000.00) × 1.15)) + ((2,450.00 <= 10,000.00) × 2,450.00 × 0.75) 1,837.50
CC002 FI ((4,100.00 > 10.000.00) × ((10,000.00 × 0.75) + (4,100.00 – 10,000.00) × 1.15)) + ((4,100.00 <= 10,000.00) × 4,100.00 × 0.75) 3,075.00
CC003 IT ((15,000.00 > 10.000.00) × ((10,000.00 × 0.75) + (15,000.00 – 10,000.00) × 1.15)) + ((15,000.00 <= 10,000.00) × 15,000.00 × 0.75) 1,3250.00

Here is a closer look at the formula for CC003 (IT):

((15,000.00 > 10,000.00) × ((10,000.00 × 0.75) + (15,000.00 – 10,000.00) × 1.15)) + ((15,000.00 <= 10,000.00) × 15,000.00 × 0.75) = 13,250.00

(1 × (7,500.00 + 5,000.00 × 1.15)) + (0 × 15,000.00 × 0.75)

1 × 7,500.00 + 5,750.00 + 0

Here is an example of a cost distribution rule if the Electricity fixed formula allocation base is assigned as the allocation base in it.

Cost object Description Magnitude Allocation factor
CC001 HR 1,837.50 (1,837.50 ÷ 18,162.50) × Amount
CC002 FI 3,075.00 (3,075.00 ÷ 18,162.50) × Amount
CC003 IT 13,250.00 (13,250.00 ÷ 18,162.50) × Amount