Differentiating Between Distribution and Overhead Allocation

Objectives

After completing this lesson, you will be able to:

  • Introduce allocation cycles

Allocation Cycles

Within the management accounting team at Bike Company SE, Chris works closely with his dedicated teammate, Robert. Robert's expertise lies in refining management accounting processes, with a special emphasis on enhancing operations in the SAP S/4HANA environment and system configuration.

In a recent team meeting, the team manager noted that the company’s transition to SAP S/4HANA presents a prime opportunity to scrutinize the current management accounting procedures, particularly the cost allocation cycles throughout the company. Robert has been assigned to spearhead this project and is now tasked with improving the allocation processes. Always open to seeking advice and generating ideas, he brings this topic to his weekly coffee corner discussion with Chris. Here's how their conversation unfolded:

Having listened in to the conversation with Chris and Robert, it's now time to take a closer look at the tools available for overhead cost allocation and understand how they can provide a trustworthy source for analysis.

We'll focus on how to use templates to manage allocations and discuss the benefits of using tags for cycle administration.

In the following lesson, you'll delve deeper into a more sophisticated, cycle-related feature: the allocation structure. This can determine which G/L account to use for cost transfers based on the type of posting and the chosen receiver. Lastly, we'll explore additional allocation contexts.

Let's begin with a comparative overview of the two main types of period-end cycles.

General Allocation Cycle Approach

Allocation is a process in management accounting of distributing cost, revenue, or balance sheet values from specific sender accounts and objects (cost center, profit center, and so on) to specific receiver accounts and objects.

An example of cost allocation can be the initial posting of electricity expenses to a generic cost center, which should subsequently be spread over the cost centers of the respective departments that utilize these facilities and, thus, should bear part of the cost.

Cycles in Overhead Cost Controlling

The necessity to allocate data regularly arises during closure. SAP S/4HANA offers a solution, universal allocation, which is a comprehensive term covering all forms of allocations. The tool encompasses multiple capacities for both financial and managerial allocations, including cost center allocation, profit center allocation, top-down distribution, intercompany allocation, and also allocation to margin analysis.

An allocation cycle is used to transfer primary and/or secondary costs from senders to receiving controlling objects. The selected tool can be different, depending on the type of sender object, the type of G/L account used for the initial posting, and the G/L Account used for the allocation: It is the allocation context. It can spread actual and planned data.

In Overhead Cost Accounting, the possible cycles are overhead allocation and distribution. Depending on whether the original account/original cost element needs to be preserved with the allocation, the allocation type selected will be different.

Let’s compare the different types in a table:

 Distribution CycleOverhead Allocation Cycle
ContextSending Cost centers, to one or more receiving cost centers or WBS elements.Sending Cost centers, to one or more cost centers, profit centers, WBS elements, or profitability segments

To be allocated

Original account/cost element with which the amounts and quantities are posted at the sender: Primary Cost ElementsOriginal account/cost element with which the amounts and quantities are posted at the sender: Primary and Secondary Cost Elements
Cost elements for posting

The original cost element is used.

Types:

  • 01 Primary costs

  • 03 Accrual cost element - percentage method

  • 04 Accrual cost element - target actual method

  • 22 External settlement

Useful when the composition of the costs is important for the receiver.

The original cost elements are not visible on the receivers.

Type: 42 Assessment

Useful when the composition of the costs is unimportant for the receiver.

ExampleFrom service cost centers to production cost centersCafeteria costs at Company A are allocated from the cafeteria cost center to the recipients of the cafeteria's services.

Once the appropriate cycle type has been selected, it is time to create it. You can create a cycle with the following methods:

  • From scratch in the Manage Allocations app

  • Copying an existing cycle

  • By template-based upload

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