Rules that spread a shared pool of cost (power, factory rent, supervision) across the products, cost centres or work centres that caused it, instead of leaving it in one expense account.
When to use it
You are working out what a product really costs, and the answer has to include its fair share of the factory overheads as well as its materials.
Before you start
- The accounts holding the overhead must be marked as cost elements on Cost Element Ledgers.
- The measure you want to spread by (machine hours, units produced, floor area) must exist on Cost Drivers, with figures recorded against it.
- You need the costing setup right.
Where to find it
Masters > Manufacturing > Cost Allocation Rules.
The fields on this screen
| Field (on screen) | What to enter | Required |
|---|---|---|
| Rule Name | (not explained yet) | No |
| Pool Type (ledger/account_group/cost_element_type) | How the cost pool is picked up: from one ledger, from a whole account group, or by cost element type. | No |
| Pool Ref (ledger/group/type id) | Which ledger, account group or cost element type the pool comes from. It must match the Pool Type. | No |
| Cost Driver (id) | The measure the pool is shared out by, such as machine hours, floor area or headcount. | No |
| Method (ratio/direct_pct/fixed_amount/even) | How the pool is split: by driver ratio, a stated percentage, a fixed amount, or evenly. | No |
| Target Type (product/cost_center/work_center) | What the cost is charged to: a product, a cost centre or a work centre. | No |
| Scope (all/group/list) | With the ratio method, which targets share the pool: all measured, one product group, or this rule's list. | No |
| Sequence (step-down order) | Order the rules run in, lowest first. Use it when one pool must be shared out before the next. | No |
| Active | Only ticked rules are used when the period allocation is run. | No |
How it works
A rule says four things: which pool of cost to spread, what measure decides each share, what kind of thing receives the cost, and how the split is worked out.
The split depends on the method:
- Ratio: each target takes the pool in proportion to its measured driver figure. This is the usual choice.
- Even: the pool is divided equally between the targets.
- Direct percentage: each target takes a stated percentage of the pool.
- Fixed amount: each target takes a stated amount, and the size of the pool is ignored.
With Ratio and Even, any rounding difference goes onto the largest line, so an allocation always adds back exactly to the pool it came from.
The pool is what was actually posted: the net expense on the named accounts for the period. A period with no cost in it allocates nothing, and you do not need to keep the rule in step with the amounts.
Sequence is the order the rules run in. It lets a service department's cost be spread onto the production departments first, and those departments then spread onto products.
Allocation itself happens as a dated run that can be reversed and run again. It writes no accounting entries, so your ledger is unchanged. What it changes is the cost figure carried by the products. The effect shows up in stock valuation and product costing, not in the trial balance.
Untick Active to take a rule out of use without deleting it.
Tips and common mistakes
- A Ratio rule whose targets have no measured figures allocates nothing; it does not guess. If a rule seems to do nothing, check that the driver has figures for the period.
- Direct percentage and Fixed amount need a list of targets with their percentage or amount, and that list is not on this form. Use Ratio or Even unless the target list has already been set up for you.
- Number the Sequence with care. Two rules that should feed each other in a particular order will not do so if they share a number.
Related guides
- Cost Drivers, Cost Element Ledgers, Overhead Budget, Production Capacity, Bill of Materials.