Create Overhead Cost Pools Through Oracles MassBudgets

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Create Overhead Cost Pools Through
OraclesMassBudgets AutoAllocations

• NCOAUG
• March 3, 2003
• Presenter
• Michael Anenen

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Presentation Agenda

• Assess Design
• Overhead Allocation Methods
• Standard Cost Overhead Sub-elements
• Oracles Overhead Application Basis Types
• Cost Pool Allocation Process
• Using Oracles MassBudgets AutoAllocations
• Questions Answers

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Presentation Agenda

• Assess Design
• Overhead Allocation Methods
• Standard Cost Overhead Sub-elements
• Oracles Overhead Application Basis Types
• Cost Pool Allocation Process
• Using Oracles MassBudgets AutoAllocations
• Questions Answers

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Assess Design
Start with the End in Mind

• Determine your Allocation Method
• Traditional
• Activity-Base Costing
• Overhead Sub-Elements
• Material Overhead
• Resource / Department Overhead

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Assess Design

• Determine your Allocation Method
• Traditional
• Activity-Base Costing
• Overhead Sub-Elements
• Material Overhead
• Resource / Department Overhead

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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 gt applied overhead, the
  difference is under-applied.
• Under-applied overhead reduces income

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Overhead Allocation Methods

• Activity-Based Costing
• Multiple Activity Based Rates Per Department

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

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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

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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

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APPLICABILITY OF OVERHEAD ALLOCATION METHODS
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APPLICABILITY OF OVERHEAD ALLOCATION METHODS
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APPLICABILITY OF OVERHEAD ALLOCATION METHODS
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Assess Design

• Determine your Allocation Method
• Traditional
• Activity-Base Costing
• Oracle Overhead Sub-Elements
• Material Overhead
• Overhead

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Oracles Cost Elements
Material
Outside processing
Resource
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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.

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Overhead Sub-Elements
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Presentation Agenda

• Assess Design
• Overhead Allocation Methods
• Standard Cost Overhead Sub-elements
• Oracles Overhead Application Basis Types
• Cost Pool Allocation Process
• Using Oracles MassBudgets AutoAllocations
• Questions Answers

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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.

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Overhead ApplicationBasis Type (Example)
MaterialOverhead
Facility Resource Value
Matl Mgmt Activity PO Process
Benefits Resource Value
Freight-In Total Value (Buy Items)
MFG Engng Resource Units
Prod. Control Activity Planning Process
Indirect Resource Value
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Oracles OverheadApplication Method (Example)
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Overhead Rates Assigned
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Overhead Cost AppliedTo Item (Example)
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Need Overhead Cost Pools
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Presentation Agenda

• Assess Design
• Overhead Allocation Methods
• Standard Cost Overhead Sub-elements
• Oracles Overhead Application Basis Types
• Cost Pool Allocation Process
• Using Oracles MassBudgets AutoAllocations
• Questions Answers

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Cost Pool AllocationStep-Down AllocationIndirect
Overhead
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Cost Pool AllocationMany Departments
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Cost Pool AllocationMany Departments
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Cost Pool AllocationIndirect OverheadWhat Is
The Process?
Finance IS Budget
Facility Budget
Administration Budget
Manufacturing Organization Departmental Budget
Overhead Cost Element Pools
Material Overhead Cost Element Pools
Material Mgmt
Freight-In
Production Control
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SummarizeAgenda Items 1-2-3

• Assess Design
• Overhead Allocation Methods
• Standard Cost Overhead Sub-elements
• Oracles Overhead Application Basis Types
• Cost Pool Allocation Process
• Using Oracles MassBudgets AutoAllocations
• Questions Answers

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Summary - Agenda Items 1-2-3

• Design assessment gt Keep the End in Mind
• Overhead allocation principles
• Allocation Methods Traditional vs. Activity and
  the advantages and disadvantages
• The applicability of overhead allocation methods
• Oracles cost elements MOH ROH
• Oracles application Basis Types
• Step-down allocation process

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Presentation Agenda

• Assess Design
• Overhead Allocation Methods
• Standard Cost Overhead Sub-elements
• Oracles Overhead Application Basis Types
• Cost Pool Allocation Process
• Using Oracles MassBudgets AutoAllocations
• Questions Answers

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Oracles 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.

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MassBudgets vs. MassAllocationsWhat is the
Difference?

• Same Functionality
• MassAllocations Balance Types
• Actual
• Encumbrance
• MassBudgets Balance Type
• Budget only

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MassBudgets 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

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MassBudgeting Process
Step 1 Define Cost Pool Budget
Step 5 Create MassBudget batches
Step 2 Copy Operating Budget to Cost Pool Budget
Step 6 Define aMassBudget formula per batch
Step 3 Gather Allocation Bases (Statistical Data)
Step 7 Validate MassBudget Batch formulas
Step 4 Review and determine Allocation formulas
Step 8 Generate MassBudget journals and Post
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Step 1Define 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.

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Step 2Copy Operating Budget Amounts

• Hit AutoCopy Button
• Select Source Budget

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Step 3Gather 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.

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Step 4Determine 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.

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Step 5Create MassBudget Batches for Each
Step-Level

• Group MassBudget batches by allocation level
• This assures accurate cost pools

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Step 6Define MassBudget Formulas
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Step 7Validate 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.

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Step 8Generate 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.

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UnderstandingOracles Formula Syntax
Budget Pool (A) Usage Factor (B) / Total Usage
(C)
OR
Segment Assignments Types - Looping gt(Parent
values only) - Summing gt(Sum child values) -
Constant gt(Child Value or Parent with
Summary Account)
Target Account (T)
Offset Account (O)
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Presentation Agenda

• Assess Design
• Overhead Allocation Methods
• Standard Cost Overhead Sub-elements
• Oracles Overhead Application Basis Types
• Cost Pool Allocation Process
• Using Oracles MassBudgets AutoAllocations
• Questions Answers

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Oracles 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.
• StepDown 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.

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AutoAllocation Process
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Step1Define AutoAllocation Set
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Step 2Submit AutoAllocation Set
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Step 3View Status of AutoAllocation Set
View Status for each Step
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Now Lets 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.

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Allocation Sequence
2.
1.
Finance IS Budget
Administration Budget
Facility Budget
Facility Overhead Cost Pool
3.
4.
Manufacturing Indirect Departments
Manufacturing Production Departments
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MassBudget Process
Step 1 Define Cost Pool Budget
Step 5 Create MassBudget batches
Step 2 Copy Operating Budget to Cost Pool Budget
Step 6 Define aMassBudget formula per batch

• COMPLETED

Step 3 Gather Allocation Bases (Statistical Data)
Step 7 Validate MassBudget Batch formulas
Step 4 Review and determine Allocation formulas
Step 8 Generate MassBudget journals.
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Step 5Define Mass Budget Batch

• Defined MassBudget Batch
• HR Admin Allocation

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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.

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AdministrationOverhead Allocation
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Finance IS Expense (OH)Allocation Basis

• Possible Allocation Basis
• Number of headcount per department
• 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

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Finance ISOverhead Allocation
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Facility Expense (OH)Allocation Basis

• Allocation Basis
• Square Footage per Department

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FacilityOverhead Allocation
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AutoAllocation Process
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Submit AutoAllocation Set
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Questions Answers

• Michael Anenen
• SSI North America
• [phone]
• michael.anenen_at_us.ssiworldwide.com