Cost Allocation - An overview

Introduction

Cost Allocation is a periodic activity in which the costs incurred by a cost center are allocated to other cost centers for which some service was rendered. In a business organization, service departments on behalf of other departments incur expenses. The former can be termed as service cost centers and the latter are line cost centers. The expenses incurred by the service cost centers are indirect in nature and should be borne by service receiving departments and included in the cost of production. To enable this, the indirect costs are allocated to the line or production cost centers that have received the service. 

Illustration

Consider an example, where a company TI has a centralized purchasing department because the key raw material is common across the different manufacturing units (or cost centers) namely tubes, cycles and metal units. The purchasing department (by itself a cost center) has its own overheads in the form of salaries, electricity and communication expenses. However, the time and effort of this department is involved in procurement for other cost centers. Therefore, the costs incurred by this cost center is transferred or allocated to the cost centers serviced by it. The basis on which the costs are allocated could be based on one or more parameters that can be specific to companies. In this example, the costs can be allocated on the basis on number of POs raised by it for other departments.

  Feature Highlights

• The component has provision to allocate overhead and service costs incurred in a Finance Book to other cost centers and cost elements mapped to them.

• Provision for specifying the debit cost element (which must be debited at the time of posting)

• Provision for a credit cost element (which must be credited at the time of posting) based on a the Function default set

• Provision for specifying the ratio or percentage in which the amount that has to be allocated must be distributed among the target cost centers

• Provision for specifying the range of target cost centers with cost elements mapped to them, to which costs are to be allocated

• Provision to copy allocation details of a specified cost center-cost element-Finance Book combination across accounting years/periods across Finance Books within a Business Unit

• Provision for execution of the current run of simulation as an incremental process on the result of the previous runs

List of Activities