Generally, cost allocations include identifying the sources of costs and spreading these costs among cost objects, such as inventory items, finished goods and unfinished goods (work in progress), sold items, or other objects. Also, cost allocations are used for allocating the incomes or expenses for financial reporting purposes.
When deciding upon which cost allocation method to use, keep in mind that none of these methods will achieve a close relationship between the allocated costs and the cost objects to which they have been applied. Consequently, it is best to use the simplest method available, and not worry about a high level of allocation precision.
The functionality of Cost Allocations cost allocations is available only if the Posting on General Ledger option is selected on the Administration > Settings > Service Settings form.
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In FirstBIT ERP, there are multiple predefined allocation methods. You can use the Accounting > Master Data > Cost Allocation Methods form to view all the available methods and to add new methods.
When deciding which cost allocation method to use, keep in mind that it is best to use the simplest method available because none of these methods will solve the problem of cost allocating precisely and correctly as based on rather vague assumptions. Generally, an allocation method defines how to allocate specific source amounts.
Allocation methods are divided by the type of allocation into the following two groups:
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As a measure for an allocation base, amount or quantity can be used, such as quantities of the finished goods produced, machine hours used, kilowatt hours consumed, or square footage occupied.
In FirstBIT ERP, most of predefined allocation methods are of the Profit and Loss allocation type. In allocations of this type, the source amounts are distributed proportionally to specific values calculated per business activity. For example, the available predefined methods use the following bases for calculating the allocation proportion:
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If any option is not selected, then the corresponding stage is not executed.
Stage 1: Allocate Costs
Only This stage is included if the Allocate Costs option is selected. During this stage, only allocation sources with the Cost of Goods/Services method type will be processed. The predefined allocation settings are used to first allocate the amounts oamounts from source accounts in the Work in Progress section to production costs; then, the expenses from the following COA sections are allocated:
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Stage 2: Calculate Financial Result
FirstThis stage is included if the Calculate Financial Result option is selected. First, the amounts from the source accounts for which the Close Directly to Profit and Loss option is selected will be moved to the target account.
Then, the allocation sources with the Profit and Loss method type will be processed. According to available allocation settings, the amounts of expenses can be allocated from the GL accounts of the following sections:
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If the applied allocation setting has the Department Wise Allocation option selected, only records with the same Department as in the source data will be used as the base for allocation.
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