- December 1, 2011
- Posted by: afr
- Category: AFR First Thoughts
Allocation methodologies. Follow this link to a spreadsheet demonstrating how this function can work for your organization.
First, your org must decide upon an appropriate “use of resources” model. Tracking a set of patterns governing the use of material resources allows the application of those “use patterns” upon predefined sets of overhead expenses. The sample spreadsheet demonstrates the allocation of expenses based upon the use of two such resources, (a) compensation totals for each department, and (b) square footage occupied by the offices of each department.
In these examples, department based subtotals for each metric are determined and are then compared to totals on a percentage basis. The expenses to be allocated (in each case, $26,548) are then broken out by the subcategory percentages. Note the change between models in the amounts charged by department. This variance doesn’t make either set necessarily correct or incorrect, it simply highlights the need for your calculation basis to be appropriate for your org.
Allocation models are only effective to the degree they are consistently applied. Determine a metric that represents a fair and justifiable breakdown of the utilization of resources. Update the supporting variables each year, due to changes that may affect your base calculation (reassigned use of office space, compensation changes, etc.). Apply that basis consistently, year over year, and you’ll achieve meaningful results.
A common expense distribution method creates a single G/L account for that purpose, attached to a predefined “home” subaccount, often “Admin” or “Plant”. Instances of that Allocation account are then created and attached to each subcategory, or department. All initial expenses are charged into the appropriate accounts in the home subaccount. The closing JE then distributes the value to be allocated from the home instance of the Allocation account, out across the corresponding subcategory instances of that same account. The net change to the Allocation account as a whole will be -0-.
Would you ever use revenue subtotals as a basis for an allocation methodology?
As always, don’t hesitate to drop me a note if you have questions.