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.

The functionality of cost allocations is available only if the Posting on General Ledger option is selected on the Administration > Settings > Service Settings form.

Manual and Automatic Allocations

Generally, allocations are performed automatically by the Month-End Closing service tool. However if needed, you can manually allocate specific costs by creating a corresponding document on the Accounting > Service Tools > Manual Cost Allocations form.

When creating a new manual allocation, you can select a specific account (from the Expenses section on the chart of accounts or from the Work in Progress subsection of the Assets section) and specify the source amount which you need to allocate. Then you can select multiple target accounts and for each specify the amount to be moved to it. The sum of allocated amounts must be equal to the source amount.

You must perform manual cost allocations before you run the period closing process with automatic allocations. The accounts involved in manual allocations, will not be processed by the automatic allocations.

In FirstBIT ERP, automatic allocations are performed by the Month-End Closing service tool for the following operations:

• Allocate costs: For Cost Allocation Methods with the Cost of Goods / Services option selected.
• Calculate financial result: For Cost Allocation Methods with either the Profit and Loss option or the Close Directly to Profit and Loss option selected.

The Month-End Closing service tool uses the data sources and allocation methods defined by using the following forms:

• Accounting > Master Data > Cost Allocation Methods
• Accounting > See also > Cost Allocation Settings

Allocation Methods

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.
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:

• Cost of Goods/Services: The source amount is distributed to the selected account of the Expense type by Item. For example, methods of this type can be used to allocate indirect and overhead costs (including work in progress) to finished goods in specific proportion calculated based on the source data, such as production volumes of particular items or direct costs of these items in the current period to be closed.
• Profit and Loss (почему не To the Financial Result GL Account??): Allocation is performed to the selected account of the Income type (from the Profit or Loss section of COA) by Business Activity, that is updates the Profit and Loss Account / Business Activity records. For example, methods of this type can be used to allocate specific expenses not assigned to any business activity (such as the sales office rent) in proportion of resulting gross profits in business activities, or in proportion of costs of goods sold within each business activity, and so forth.

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:

• Sales Volumes calculated for business activities ("To the financial result GL account based on sales volume")
• Revenues calculated for business activities ("To the financial result GL account based on revenue")
• Costs of Goods Sold calculated for business activities ("To the financial result GL account based on cost of goods sold")
• Gross Profits calculated for business activities ("To the financial result GL account based on gross profit method")

Generally, the base or the data for proportion calculation is a structure of the following records: GL Account / Entity / Expense Item or Income Item / Business Activity / Item / Amount.

For more details, see The Bases for Allocations. If the Production module is enabled in your application, you can easily create allocation methods of the Cost of Goods/Services type based on the available predefined data sources.

Cost Allocation Settings

Using the Accounting > See also > Cost Allocation Settings form, you can specify particular GL accounts (more precisely, records structured as GL Account / Department / Entity) to be used as source of amounts for allocation and which allocation methods should be used for these sources. You can use the predefined allocation settings, edit them, or define new settings. If there are more than one settings for the same GL account or account section, the latest settings will be used.

Balances of some accounts you can move without allocation to another accounts - for this you can select the Close Directly to Profit and Loss option and specify the particular target account from the Profit and Loss section on the chart of accounts, COA.

For accounts which balances you want to actually allocate, make sure that a check box for the Close Directly to Profit and Loss option is cleared – this enables the fields you need to specify the allocation rules.

If you select the Department Wise Allocation option, you can narrow the base by data records with specific department, that is the department specified in allocation source on the Allocation Settings form. With this option selected in case of the To the financial result GL account based on gross profit method, expenses or revenues will be allocated to the Profit or Loss account proportionally to profits earned by this department in each business activity in which it participated. 

Also, you can select an expense item in the Expense Item for Allocation field to consolidate amounts being the allocated which originally were recorded under other (related) expense items. For example, if you record gas costs on per vehicle basis, you can allocate all such expenses under the Transportation Costs expense item. If no expense item is selected in this field, the expenses will be allocated according to the expense items of the source.

When the month-end closing process is being executed, for each record GL Account/ Department / Entity it checks if there is an available allocation setting (rule). If the rule exists, the process applies this rule. If there is no such rule, the process checks if any rule exists for the section of the GL account and applies this rule. If no rule is found, no amount from this GL account will be allocated.

For allocating, the source data is structured as follows: GL Account/ Department /Amount.

For more details on allocation settings, refer to Allocation Settings.

Execution of Allocations

Generally, automatic allocations are executed by the Month-End Closing service tool in two stages:

• Allocate the Costs
• Calculate Financial Result

If any option is not selected, then the corresponding stage is not executed.

Stage 1: Allocate Costs

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 oamounts from source accounts in the Work in Progress section to production costs; then, the expenses from the following COA sections are allocated:

• PL Selling Expenses
• PL Administrative Expenses (Employees)
• PL Administrative Expenses (Fixed Assets)
• PL Administrative Expenses (Intangible Assets)
• PL Administrative Expenses (Other)
• PL Other Operating Expense
• PL Finance Costs
• PL Non-Operating Expense
• PL Current Tax Expense

Stage 2: Calculate Financial Result

This 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:

• PL Revenue
• PL Cost Of Goods Sold (Inventories)
• PL Cost Of Goods Sold (Fixed Assets)
• PL Cost Of Goods Sold (Intangible Assets)
• PL Cost Of Goods Sold (Employees)
• PL Cost Of Goods Sold (Other)
• PL Selling Expenses
• PL Administrative Expenses (Employees)
• PL Administrative Expenses (Fixed Assets)
• PL Administrative Expenses (Intangible Assets)
• PL Administrative Expenses (Other)
• PL Other Operating Expense
• PL Finance Costs
• PL Non-Operating Expense
• PL Current Tax Expense

The data is structured as follows: GL Account / Department / Business Activity / Expense item / Amount.

Also, the amounts from GL accounts (of the Income type) that are located in the following COA sections will be allocated:

• PL Revenue
• PL Other Operating Income
• PL Finance Income
• PL Non-Operating Income

The data is structured as follows: GL Account / Department / Business Activity / Income item / Amount.

If source account's records have some non-empty Business Activities, the records with the same Business Activities should be excluded from the base data that will be used for proportion calculation.

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.