Similar to what has been shown in the previous posts on cost allocations, also this post will shown an allocation technique that makes use of a dimension hierarchy that includes additional summary nodes. The allocation technique shown below will once again be based on the financial data that have been used in prior posts.
However, this time a hierarchy allocation base is setup for making the cost allocations.
The hierarchy allocation base that is setup and illustrated in the previous screenprint defines that the previously used formula – which calculates the total direct costs – will be used as the allocation base for those cost centers that belong to the ‘DIRECT CC’ node of the cost object dimension hierarchy.
This cost allocation base is then used in the cost allocation policy shown next and defines that all cost centers that belong to the ‘INDIRECT CC’ node will be allocated to the operative (‘direct’) cost centers based on the total costs that have been recorded on the operative cost centers.
Different from what has been shown in part 7 of this series on the cost accounting module, the cost allocations ignore the cost relationships within the group of the indirect cost centers because the hierarchy allocation base specified refers to the ‘DIRECT CC’ node only.
As before, the next screenprints summarize the allocation results.
Please note that the total costs on the direct or operating cost centers no. 210-250 are identical to what has been shown in part 7 of this series. Yet, a detailed investigation of the allocations made reveals that the allocations within the group of the indirect cost centers are skipped.
In the next part, we will extend the hierarchy allocation base allocation technique and investigate how it can be applied to costing scenarios that make use of fixed and variable costs. Till then.