create overhead cost pools through oracle’s massbudgets & autoallocations atlanta - oaug...

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

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


• Activity-Based Costing– Multiple Activity Based

Rates Per Department

• Traditional– Single Plant-Wide Rate– Single Rate Per

Department


• 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


• 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.




Stages

Basis of Overhead


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.




Stages

Basis of Overhead


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







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






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


Manufacturing OrganizationDepartmental Budget

Material OverheadCost Element Pools

MaterialMgmt

Freight-InProduction

ControlIndirect

MFGEngn’g

BenefitsFacility

SummarizeAgenda Items 1-2-3







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







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







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.

Allocation SequenceFinance & IS

BudgetFacilityBudget


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




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


C-L-C


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




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


C-L-C


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

[email protected]

Paul KraskiewiczSSi North America

(312) [email protected]

create overhead cost pools through oracle’s massbudgets & autoallocations atlanta - oaug...

Documents

overhead cost of resource

overhead cost of material

overhead cost pools

estimated overhead costs

activity cost

underapplied overhead

material cost

fixed cost