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Transcript of Create Overhead Cost Pools Through Oracle’s MassBudgets & AutoAllocations Atlanta - OAUG November...
Create Overhead Cost Pools Through Oracle’s
MassBudgets & AutoAllocations
Atlanta - OAUGAtlanta - OAUG
November 21, 2003November 21, 2003
Presenters:
Michael Anenen & Paul KraskiewiczMichael Anenen & Paul Kraskiewicz
Presentation Agenda
1. Assess & Design– Overhead Allocation Methods
– Standard Cost Overhead Sub-elements
2. Oracle’s Overhead Application Basis Types
3. Cost Pool Allocation Process
4. Using Oracle’s MassBudgets & AutoAllocations
5. Questions & Answers
Presentation Agenda
1. Assess & Design– Overhead Allocation Methods
– Standard Cost Overhead Sub-elements
2. Oracle’s Overhead Application Basis Types
3. Cost Pool Allocation Process
4. Using Oracle’s MassBudgets & AutoAllocations
5. Questions & Answers
Assess & Design
• Determine your Allocation Method– Traditional– Activity-Base Costing
• Overhead Sub-Elements– Material Overhead– Resource / Department Overhead
Start with the End in Mind
Assess & Design
Determine your Allocation Method– Traditional– Activity-Base Costing
• Overhead Sub-Elements– Material Overhead– Resource / Department Overhead
Overhead Allocation Methods
• Basic Principals– Estimate overhead costs for the coming year– Estimate activity for the coming year– Calculate application rate as
Estimated Overhead Costs / Estimated Activity
– Apply overhead using actual activity and the application rate.
– If actual overhead > applied overhead, the difference is under-applied.
– Under-applied overhead reduces income
Overhead Allocation Methods
• Activity-Based Costing– Multiple Activity Based
Rates Per Department
• Traditional– Single Plant-Wide Rate– Single Rate Per
Department
Overhead Allocation Methods
• Traditional Allocation– All overhead costs are
applied using the same rate.
– Activity is measured with a single concept, such as:
• Direct labor hours
• Direct labor dollars
• Machine hours
• Advantages:– Simple Arithmetic– Easy to understand
• Disadvantages:– Little relationship
between costs and activities
– Can lead to poor business decisions
Overhead Allocation Methods
• Activity Based Allocation– Overhead costs are
divided into cost pools.– Each cost pool has its
own activity measure (cost driver).
• Number of purchase orders
• Number of setups
• Advantages:– Closer causal links
between costs and activity
– Better cost allocations
• Disadvantages:– Complex calculations– High start-up costs
APPLICABILITY OF OVERHEAD
ALLOCATION METHODS Method of Assigning Overhead
Type of Allocations Number of
Stages
Basis of Overhead
RatesWhen Applicable
Single Plant Wide Rate
From a single aggregated cost pool, to products
A production volume related activity measure, e.g., direct labor hours or dollars, machine hours, etc.
Plant produces only one, or a few similar products that consume all indirect resources in the same proportions, e.g., Product X consumes 10% of each indirect resource in the plant.
APPLICABILITY OF OVERHEAD
ALLOCATION METHODS Method of Assigning Overhead
Type of Allocations Number of
Stages
Basis of Overhead
RatesWhen Applicable
Single Rate Per Department
From service departments, to producing departments' single cost pools (overhead accounts), to products
A production volume related activity measure. These may be different for each department
Each department produces only one, or a few similar products that consume all of a department's indirect resources in the same proportions, e.g., Product X consumes 20% of all indirect resources in Department A, 10% of all indirect resources in Department B, etc.
APPLICABILITY OF OVERHEAD
ALLOCATION METHODS Method of Assigning Overhead
Type of Allocations Number of
Stages
Basis of Overhead
RatesWhen Applicable
Multiple Activity Based Rates Per Department
From service departments, to producing departments' activity cost pools, to products
Both production volume related and non-production volume related activity measures, e.g., number of purchase orders, number of setups, etc.
Each department produces many products that consume resources within each department in different proportions, e.g., Product X consumes 30% of the power, 15% of the engineering work and 20% of the repair in Department A. Multiple rates are needed in Department A.
Assess & Design
• Determine your Allocation Method– Traditional– Activity-Base Costing
Oracle Overhead Sub-Elements– Material Overhead– Overhead
Oracle’s Cost Elements
Material
Resource
OverheadOutside
processing
Material Overhead
Resource
Oracle Cost ElementsMaterial Overhead & Overhead
• Overhead (Resource):– This is the overhead cost of resource and
outside processing. Overhead is used as a means to allocate indirect production costs.
• Material Overhead:– This is the overhead cost of material,
calculated as a percentage of the material cost or as a fixed charge per item, lot, or activity.
Overhead Sub-Elements
Materialoverhead
Materialoverhead
Resource overhead
Resource overhead
MaterialMgmt
MaterialMgmt FacilityFacility
Freight-InFreight-In BenefitsBenefits
ProductionControl
ProductionControl
IndirectIndirect
MFGEngn’g
MFGEngn’g
Overhead Cost
Sub-Elements
Overhead Cost Elements
Presentation Agenda
1. Assess & Design– Overhead Allocation Methods
– Standard Cost Overhead Sub-elements
2. Oracle’s Overhead Application Basis Types
3. Cost Pool Allocation Process
4. Using Oracle’s MassBudgets & AutoAllocations
5. Questions & Answers
OracleApplication Basis Types
• Activity: Directly associate the activity cost with the item.• Item: Assign a fixed cost per item.• Lot: Assign a lot charge to items and operations.• Resource units: Charge overhead by multiplying the
overhead amount by the number of resource units earned in the routing operation.
• Resource value: Charge overhead by multiplying the overhead rate by the resource value earned in the routing operation.
• Total value: Charge overhead by multiplying the total cost of the item by the material overhead rate.
Overhead ApplicationBasis Type (Example)
MaterialOverhead
MaterialOverhead
Prod. ControlActivity:
Planning Process
Prod. ControlActivity:
Planning Process
Facility:Resource Value
Facility:Resource Value
Freight-In:Total Value(Buy Items)
Freight-In:Total Value(Buy Items)
Benefits:Resource Value
Benefits:Resource Value
Mat’l Mgmt:Activity:
PO Process
Mat’l Mgmt:Activity:
PO Process
Resource Overhead
Resource Overhead
Indirect:Resource Value
Indirect:Resource Value
MFG Engn’g:Resource Units
MFG Engn’g:Resource Units
Overhead Cost Elements
Overhead Cost
Sub-Elements
And
Application Basis Types
Oracle’s OverheadApplication Method (Example)
Material
Overhead
Resource
Overhead
Activity Application Basis Type
Method of Applying Overhead
Material
Management
P.O.
Process
Activity
(Number of POs)
Amount per Item
Based on Activity
Freight-In Total Value
(Buy Items)
Single Rate
( Buy Items Only)
Production
Control
Planning
Process
Activity
(# of Work Orders)
Amount per Item
Based on Activity
Facility Resource Value
(i.e Labor Cost)
Single Rate
Per Department
Benefits Resource Value
(i.e Labor Cost)
Single Rate
Plant-Wide
MFG
Engineering
Resource Units
(i.e. Std Hours)
Single Amount
Per Department
Indirect Resource Value
(i.e Labor Cost)
Single Rate
Per Department
Overhead Rates Assigned
Overhead Cost AppliedTo Item (Example)
Need Overhead Cost Pools
Material Overhead Resource OverheadMaterial
ManagementFreight-In
Production
ControlFacility Benefits
MFG
EngineeringIndirect
Amount Per Item
(Activity)
Single Rate
(Buy Items Only)
Amount Per Item
(Activity)
Single Rate
(Per Dept)
Single Rate
(Plant-Wide)
Single Amt.
(Per Dept)
Single Rate
(Per Dept)
Overhead Cost Pools Dollar$
??? ??? ??? ??? ??? ??? ???
Activity / VolumesNumber of Purchase
Orders
Total $ Value of
Buy Items
Number of Work
Orders
Resource $ Value
Resource $ Value
Resource Units
(Std Hours)
Resource $ Value
Rates or Amounts
$$ % $$ % % $$ %
Presentation Agenda
1. Assess & Design
– Overhead Allocation Methods
– Standard Cost Overhead Sub-elements
2. Oracle’s Overhead Application Basis Types
3. Cost Pool Allocation Process
4. Using Oracle’s MassBudgets & AutoAllocations
5. Questions & Answers
Cost Pool AllocationStep-Down Allocation
Indirect Overhead
Finance & ISBudget
OverheadCost Element Pools
FacilityBudget
AdministrationBudget
Manufacturing OrganizationDepartmental Budget
Material OverheadCost Element Pools
MaterialMgmt
Freight-InProduction
ControlIndirect
MFGEngn’g
BenefitsFacility
Cost Pool AllocationMany Departments
Hum anResources
President & CEO
VP Legal
Adm inistrationBudget
M anagerof Facilities
Equipm entM aintenance
Bldg. & Grounds
FacilitiesBudget
VP Financeand CFO
Accounting
Payroll Dept
Inform ation System s
Finance & ISBudget
Cost Pool AllocationMany Departments
VP M FG
Purchasing
Receiving
W arehousing& Shipping
M aterialM anagem ent
Planning
Shop FloorControl
ProductionControl
ProcessEngineering
IndustrialEngineering
M anufacturingEngineering
M etal
P lating
FabricationDepartm ents
PCB
Sub-Assem by
Final Asem bly
Test
Packing
Assem blyDepartm ents
M anufacturing O perations
Cost Pool AllocationIndirect OverheadWhat Is The Process?What Is The Process?
Finance & ISBudget
OverheadCost Element Pools
FacilityBudget
AdministrationBudget
Manufacturing OrganizationDepartmental Budget
Material OverheadCost Element Pools
MaterialMgmt
Freight-InProduction
ControlIndirect
MFGEngn’g
BenefitsFacility
SummarizeAgenda Items 1-2-3
1. Assess & Design– Overhead Allocation Methods
– Standard Cost Overhead Sub-elements
2. Oracle’s Overhead Application Basis Types
3. Cost Pool Allocation Process
4. Using Oracle’s MassBudgets & AutoAllocations
5. Questions & Answers
Summary - Agenda Items 1-2-3
• Design assessment > Keep the End in Mind• Overhead allocation principles• Allocation Methods: Traditional vs. Activity
and the advantages and disadvantages• The applicability of overhead allocation
methods• Oracle’s cost elements: MOH & ROH• Oracle’s application Basis Types• Step-down allocation process
Presentation Agenda
1. Assess & Design
– Overhead Allocation Methods
– Standard Cost Overhead Sub-elements
2. Oracle’s Overhead Application Basis Types
3. Cost Pool Allocation Process
4. Using Oracle’s MassBudgets & AutoAllocations
5. Questions & Answers
Oracle’s MassBudgetsDefinition
• A feature that allocates expenses across a group of cost centers, departments, divisions, and so on. It allows you to build a complete budget/Cost Pool using simple formulas based on actual results, other budget amounts, and statistics.– For example, you might want to allocate your
facility overhead costs to each of your departments based on the square footage in each department.
MassBudgets vs. MassAllocationsWhat is the Difference?
• Same Functionality
• MassAllocation’s Balance Types:– Actual– Encumbrance
• MassBudget’s Balance Type– Budget only
MassBudget’s Major Features• Allocate cost pools to many accounts using a single
formula• Base your allocations on Current Period, Previous
Period, or Year Ago, Same Period• Base your allocations on monetary or statistical account
balances• Define your allocation formulas once, and use them as
frequently as needed• Run MassBudgets multiple times without reversing the
outdated amounts• Use MassBudgets to do rate-based, usage-based and
step-down allocations• Include summary accounts or foreign currency amounts
in your allocations
MassBudgeting Process
Step 2: Copy OperatingBudget to Cost Pool
Budget
Step 4: Reviewand determine
Allocation formulasStep 8: Generate
MassBudget journalsand Post
Step 1: Define Cost Pool Budget
Step 5: Create MassBudget batches
Step 3:Gather Allocation
Bases (Statistical Data)
Step 7: ValidateMassBudget Batch
formulas
Step 6: Define aMassBudget formula
per batch
Step 1:Define Cost Pool Budget
•Create a budget to represent a collection of estimated amounts for a range of accounting periods. You can use AutoCopy to create a new budget from an existing budget.
Step 2:Copy Operating Budget Amounts
1. Hit AutoCopy Button2. Select Source Budget
Step 3:Gather Allocation Bases
(Statistical Data)
• Review all required statistical accounts and enter additional values into the Account Segment. For example Headcount, Production Hours, Resource $ Value, etc.
• Enter Budget amounts/journals for each account combination for all statistical data.
Step 4:Determine Allocation Formulas
• Review your requirements and determine the allocation formulas. For example determine your allocation basis to allocate IS overhead to other departments.
• Define Rollup Groups and Summary Accounts for allocation purposes.
• List the required MassBudget batches in sequence.
Step 5:Create MassBudget Batches for
Each Step-Level
•Group MassBudget batches by allocation level
•This assures accurate cost pools
Step 6:Define MassBudget Formulas
Step 7:Validate MassBudget Batch Formulas
• After you define a new allocation batch, or change an allocation formula, you must validate the batch by running the MassBudget Validation program. The program verifies that your allocation formulas conform to the allocation formula definition rules.
Step 8:Generate MassBudget Journals
• Using budget journals maintain an audit trail for your budget balances.
• Generate MassBudget Journals to create unposted budget journal batches based on your validated MassBudget formulas. The generated journal batch contains an entry for every allocation formula in the batch.
UnderstandingOracle’s Formula Syntax
Budget Pool (A)* [Usage Factor (B) / Total Usage (C)]
Segment Assignments Types:- Looping >(Parent values only)
- Summing >(Sum child values)
- Constant >(Child Value or Parent with Summary Account)
Target Account (T)
Offset Account (O)
OR
Presentation Agenda
1. Assess & Design
– Overhead Allocation Methods
– Standard Cost Overhead Sub-elements
2. Oracle’s Overhead Application Basis Types
3. Cost Pool Allocation Process
4. Using Oracle’s MassBudgets & AutoAllocations
5. Questions & Answers
Oracle’s AutoAllocation Definition
• AutoAllocations is a powerful feature to automate journal batch validation and generation for MassBudgets.
• Two types of AutoAllocation– Parallel AutoAllocation: Validates and generates all
the journal batches in your AutoAllocation set simultaneously.
– Step–Down: Create journal batches in a specific sequence. Order your journal batches so that the posted results of one step are used in the next step of the AutoAllocation set.
AutoAllocation Process
Step 2:Submit AutoAllocation
Step 1:Define
AutoAllocation Set
Step 3:Review Status
of AutoAllocation
Step 4:Post Generated
Journals
Step1Define AutoAllocation Set
Step 2:Submit AutoAllocation Set
Step 3:View Status of AutoAllocation Set
View Status for each Step
Now Let’s Put It All TogetherExample
• Using Mass Budgeting create the Facility overhead cost pool.Assumptions:– The OH application method is a single rate
based on resource value of the budgeted production volume per department.
– You must perform all previous (top-level) allocations first.
– Remember to create a step-down AutoAllocation set to insure the proper sequence for an accurate cost pool.
Now Let’s Put It All TogetherExample
• Using Mass Budgeting create the Facility overhead cost pool.Assumptions:– The OH application method is a single rate
based on resource value of the budgeted production volume per department.
– You must perform all previous (top-level) allocations first.
– Remember to create a step-down AutoAllocation set to insure the proper sequence for an accurate cost pool.
Allocation SequenceFinance & IS
BudgetFacilityBudget
AdministrationBudget
Facility Overhead Cost Pool
Metal Plating PCB Test PackingSub-Assembly Final Assembly
ManufacturingIndirect Departments
ManufacturingProduction Departments
3. 4.
2.1.
MassBudget Process
Step 2: Copy OperatingBudget to Cost Pool
Budget
Step 4: Reviewand determine
Allocation formulasStep 8: Generate
MassBudget journals.
Step 1: Define Cost Pool Budget
Step 5: Create MassBudget batches
Step 3:Gather Allocation
Bases (Statistical Data)
Step 7: ValidateMassBudget Batch
formulas
Step 6: Define aMassBudget formula
per batch
Step 5:Define Mass Budget Batch
• Defined MassBudget Batch:
HR & Admin Allocation
Administration Expense (OH)Allocation Basis
• Allocation Basis– Based on number of headcount per
department• Note: You do not have to allocate all Admin.
Expenses by the same basis• Remember to group all Administration
allocations in the same MassBudget batch for proper sequencing later.
AdministrationOverhead Allocation
01 = Company 800 = Administration Parent 7000 = Total Expense Parent
T = Total All Departments HCNT = Headcount 8100 = MassAllocations In
8200 = MassAllocations Out
AccountCompany-Department-Account
Currency Amount Type
Relative Period
A 01-800-7000
Summary Account
USD PTD or YTD
Current Period
* C-C-C
B 01-T-HCNT STAT PTD Current Period
/ C-L-C
C 01-T-HCNT STAT PTD Current Period
C-S-C
T: 01-T-8100 USD PTD Current Period
C-L-C
O: 01-530-8200 USD PTD Current Period
C-C-C
Finance & IS Expense (OH)Allocation Basis
• Possible Allocation Basis– Number of headcount per department– Optionally use multiple allocation steps:
• Allocate Cost Accounting portion of Finance• Allocate IS expenses based on Departmental
activity study of IS services consumed.• Allocate Payroll on headcount
Finance & ISOverhead Allocation
01 = Company 700 = Finance & IS Parent 7000 = Total Expense Parent
T = Total All Departments HCNT = Headcount 8100 = MassAllocations In
8200 = MassAllocations Out
AccountCompany-Department-Account
Currency Amount Type
Relative Period
A 01-700-7000
Summary Account
USD PTD or YTD
Current Period
* C-C-C
B 01-T-HCNT STAT PTD Current Period
/ C-L-C
C 01-T-HCNT STAT PTD Current Period
C-S-C
T: 01-T-8100 USD PTD Current Period
C-L-C
O: 01-700-8200 USD PTD Current Period
C-C-C
Facility Expense (OH)Allocation Basis
• Allocation Basis– Square Footage per Department
FacilityOverhead Allocation
01 = Company 840 = Facility Parent 7000 = Total Expense Parent
T = Total All Departments SQFT = Square Footage 8100 = MassAllocations In
8200 = MassAllocations Out
AccountCompany-Department-Account
Currency Amount Type
Relative Period
A 01-840-7000
Summary Account
USD PTD or
YTD
Current Period
* C-C-C
B 01-T-SQFT STAT PTD Current Period
/ C-L-C
C 01-T-SQFT STAT PTD Current Period
C-S-C
T: 01-T-8100 USD PTD Current Period
C-L-C
O: 01-840-8200 USD PTD Current Period
C-C-C
AutoAllocation Process
Step 2:Submit AutoAllocation
Step 1:Define
AutoAllocation Set
Step 3:Review Status
of AutoAllocation
Step 4:Post Generated
Journals
Submit AutoAllocation Set
Questions & Answers
Michael Anenen
SSi North America
(312) 755-8257
Paul KraskiewiczSSi North America
(312) [email protected]