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 article 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	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

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	Name	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