Cost rollup policy and overhead calculation

Cost accounting lets you gain insight into how the cost flow relates to the products and services that are delivered within an organization. To see the cost transparency, it's crucial to achieve cost allocation between cost objects based on an appropriate allocation basis. By default, the cost allocation is achieved for the primary cost element, which is desired in some situations, but it has a few implications that should be considered.

• Auxiliary cost objects will end with a zero balance for the primary cost element after overhead calculation.
• The volume of cost entries generated by overhead calculation can be very high.
• It is not possible to track the cost flow between cost objects.

To avoid these implications, Cost accounting lets you configure cost allocation to fit into your organization managerial reporting requirements. This article discusses how you can determine the correct level of secondary cost elements and create cost rollup rules that fit into organization reporting and cost traceability.

Example of cost rollup policy setup

Imagine that an organization has the following structure with 4 cost centers.

Cost object dimension

Cost element dimension

A dimension hierarchy that fulfills the organizational reporting requirements can be set up as follows.

Dimension hierarchy details

Dimension hierarchy

A dimension hierarchy that fulfills the policy requirement can be set up as follows.

Dimension hierarchy details

Dimension hierarchy

After the general ledger entries are processed, the cost entry balance by cost object looks like this.

Statistical dimension

Cost object CC001 HR is contributing HR services to several cost objects.

HR services are consumed by the following distribution of magnitude.

Cost object CC002 Finance is contributing to several cost objects.

Finance services are consumed by the following distribution of magnitude.

Cost allocation polices can be set up as follows.

Cost allocation rules can be set up as follows.

How cost flows between cost centers

If you want to learn how cost flows between the cost centers in the organization, you can create cost elements of the type Secondary for each cost center. These cost elements will then be used to transfer balances between the cost centers during the overhead calculation.

Cost element dimension members can be set up as follows.

The dimension hierarchy Profit & Loss statement needs to be updated with the new dimension members so that the dimension hierarchy contains the correct data that can be used for defining reporting and policies.

Dimension hierarchy details

Dimension hierarchy

Create a Cost rollup policy where each cost center is mapped to a corresponding cost element of the type Secondary.

Cost rollup polices

Cost rollup rules

Perform overhead calculation

Journal

The system will now apply the Cost rollup policy when it creates the Cost object balance journal entries.

Cost object balance journal entries

The Cost object cost balance journal entry details page that is accessed from the journal entries displays how the balance is obtained.

Example: The journal entry for Cost object CC002 Finance

Cost object cost balance journal entry details

Cost entries generated by the Overhead calculation

After the Overhead calculation is completed, you can report the results using tools such as Microsoft SharePoint Workspace, Excel, or Power BI.

View reporting in Excel

The dimension hierarchies allow you to view data at different aggregation levels.

Here is an example of a Power Pivot reporting in Excel.

Using Cost rollup policy and Cost elements of the type secondary allows you to leave the primary cost per cost object for internal reporting as the primary cost that remains after Overhead calculation.

If the same example had been performed without creating the Cost rollup policy, the reporting result would be as shown below. The cost flows correctly but the traceability and insight into how cost flows between the cost centers are lost.

Depending on the reporting and traceability requirements in your organization, you can determine the correct level of secondary cost elements and create cost rollup rules that fit your needs.

The clear separation between Cost allocation and Cost rollup policies provides the flexibility to make continuous updates without affecting each other.

Additional resources

• Cost object dimensions
• Cost element dimensions
• Dimension hierarchy
• Overhead calculation