Analyzing Overhead Allocation Cycles

There are cost postings that are relevant for management accounting, but identifying the correct controlling account assignment at the time of posting is difficult. Postings such as telephone costs, postage costs, insurance, and so on, are entered as they arise in financial accounting. The accountant initially posts to an auxiliary cost center created specifically for collecting specific costs. This way, instead of splitting the initial posting into as many cost line items as there are relevant cost centers, the accountant makes a single cost entry.

In management accounting, special allocation cycles are configured for distribution or allocation of auxiliary cost postings. The cycles contain segments, each of which details a sender/receiver relationship. First, the sender rules are defined: Which cost centers and accounts send which values with which cost account. Then, you define the receiver rules: to which cost centers and which values to each cost center.

When you run the allocation cycles periodically, the auxiliary cost center is credited as a sender and the receiver cost centers are debited according to their defined cost share.

Sometimes it's necessary to adapt the allocation cycle definition after a run. In this case you need to check the changes made to this allocation cycle.

An overhead allocation for cost center allocations is used to transfer primary and secondary costs from a sender cost center to receiving controlling objects.

100 % or less of the costs of the sender cost center can be allocated. Posted amounts, fixed amounts and fixed rates of the sender cost center can be allocated. Senders can only be cost centers. The receivers of the overhead allocation can be other cost centers or WBS elements.

Primary and secondary costs (for example: Energy costs) are allocated at period-end closing according to the defined rules of the overhead allocation. These receiver rules include Fixed Percentages, Fixed Portions, and Variable Portions. The variable portions, in turn, include the statistical key figures. To each segment of the overhead allocation a G/L Account with the G/L Account Type secondary costs that has the Cost Element Category 42 – Assessment is assigned. As a result, all costs allocated in an overhead allocation are charged to the receivers with the assessment G/L Account number (category 42) defined in the segment. At the same time, the sender is credited with the same assessment G/L Account Number (type Category 42).

In overhead cost allocations, the original primary and secondary G/L accounts are therefore not used to credit the sender and debit the receiver. Instead, the costs on both sides are transferred through a secondary cost G/L account with cost element category 42 (assessment).

In the figures below, you will see how you can further manipulate the values allocated to receivers through the application of weighting factors on statistical key figures.

In the context of a segment, you can influence the statistical key figure values, if necessary.

In the above example, if the statistical key figure values were to apply on the receiver cost centers alone, the cost center IT Service would have to bear 10/42 * 9000 EUR = EUR 2142.86 of the costs that were posted to the cost center Cafeteria over the month. Cost center Administration would carry 12/42 * 9000 EUR = 2571.43 EUR and cost center Sales with most employees 20/42 * 9000 EUR = 4285.71 EUR.

However, if you take into account that the employees of the sales cost center are more likely to be at the customer during the month for sales events and therefore use the cafeteria less frequently than the employees of the other cost centers who eat daily in the cafeteria, this must be taken into account in the weighting of the cost allocation.

In the above example, only 25%, i.e 5 out of 20 sales employees eat in the cafeteria within one month, while the employees of the other cost centers eat at 100% in the cafeteria. For this reason, these cost centers must take on more costs from the cafeteria on a proportional basis than the sales cost center.

The figure above shows the respective costs for all three receiver cost centers taking the receiver weighting factor into account.

After setting up all your allocation cycles, you run them at the end of each fiscal period after all financial postings are completed.

Depending on the number and complexity of the allocation cycles, there are various ways to process them.

You can configure cycles to be executed sequentially, that is, one after the other, or in parallel, the settings are as follows:

• In both cases, you must create universal allocations hierarchies based on the Manage Global Hierarchies application.
• In variant 1, you must create exactly one hierarchy in which the two allocation cycles are to be assigned in the correct sequence. These are then processed sequentially.
• In variant 2, you have to create two hierarchies and assign one allocation cycle to each of them. These are then executed in parallel.

All cycles within one hierarchy are processed sequentially but in parallel with cycles in distinct hierarchies.

The allocation is executed using the Run Allocations application.

The Manage Allocation Changes tile is used to display changes made to allocation cycles. This tile displays allocation cycle definitions in the same format as in the Manage Allocations tile. This allows you to identify cycle definition changes, section by section and tab by tab.

Example:

You create allocation cycle ABC. You run the cycle as a live run (Run A). Later, you make changes to the definition of cycle ABC and run it as a live run again (Run B). The Manage Allocation Changes tile will capture two records of the definition of cycle ABC – one as it existed for Run A, one as it existed for Run B.