In the previous post, the costs that have been accumulated on the indirect cost centers no. 110, 120 and 130 were allocated to the other cost centers based on amounts that have been recorded on selected cost elements (ledger accounts 851000 and 852000).

Within this post, we will investigate an alternative, formula-based allocation method that allocates the costs of the indirect cost centers (based on the amounts that have been recorded on multiple cost elements) to the operative cost centers no. 210-250.

As in the previous post, the allocations will be made based on the following accounting data that have been recorded in the finance modules. To implement the formula-based allocation approach, a formula allocation base needs to be setup first. Setting up this allocation base requires first that an association to the existing predefined allocation bases is made (1). In the example shown below, all cost elements (ledger accounts) that have been used are simply selected and associated with an abbreviated alias. Once the association to the predefined allocation bases is made, the formula that calculates the allocation base is defined in a second step (2) by making use of mathematical operators. Currently, the following mathematical operators are available for specifying allocation based formulas. The next step consists of defining the allocation policy; this time, by specifying that the costs of the indirect cost centers no. 110, 120 and 130 shall be allocated to the other operative cost centers (no. 210-250) based on total direct costs. This is realized by associating the previously defined formula allocation base to the indirect cost centers and is illustrated in the next screenprint. Once the allocations are processed – not shown for reasons of brevity; for details, see the prior post – the following costs remain at various cost centers:

From the screenprints shown above, one can identify that the costs of the indirect cost centers no. 110, 120 and 130 have been cleared. However, different from the previous post, more allocations are made. Take cost center 110 as an example, which does not only allocate its own primary costs (\$32000) to the other cost centers but also the secondary costs it receives from the other operative cost centers (\$626.01 from the car pool cost center and \$1841.20 from the product management cost center).

Executing such kind of allocations necessitates the use of an iterative approach that allocates the costs of the indirect cost centers several times until all costs are allocated to the operative (‘direct’) cost centers no. 210-250.

The next Excel document summarizes the different allocations made and highlights the fact that allocations are not only made from the indirect cost centers (110-130) to the operative cost centers (210-250) but also within the group of indirect cost centers.  In the first post on the cost accounting module it was mentioned that cost allocations can also be made in the General Ledger (GL) module by making use of the allocation functionality. The GL allocation functionality suffers, however, from the fact that it cannot handle iterative cost allocations as the cost accounting module can. For complex allocation scenarios, the cost accounting module is thus the one to go for.

In the next post we will take a look at a third alternative allocation scenario that makes use of statistical measures for allocating costs. Till then.