Create Overhead Cost Pools

Through Oracles
MassBudgets & AutoAllocations
Atlanta - OAUG
November 21, 2003
Presenters:
Michael Anenen & Paul
Kraskiewicz

Presentation Agenda
1. Assess & Design
Overhead Allocation Methods
Standard Cost Overhead Sub-elements

2. Oracles Overhead Application Basis Types

3. Cost Pool Allocation Process
4. Using Oracles MassBudgets &
AutoAllocations
5. Questions & Answers

Presentation Agenda
1. Assess & Design
Overhead Allocation Methods
Standard Cost Overhead Sub-elements

2. Oracles Overhead Application Basis Types

3. Cost Pool Allocation Process
4. Using Oracles MassBudgets &
AutoAllocations
5. Questions & Answers

Assess & Design

Start with the End in Mind
Determine your Allocation Method
Traditional
Activity-Base Costing

Overhead Sub-Elements
Material Overhead
Resource / Department Overhead

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

Traditional
Single Plant-Wide Rate
Single Rate Per
Department

Activity-Based Costing
Multiple Activity Based
Rates 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
Single Plant
Wide Rate

Type of
Allocations
Number of
Stages
From a single
aggregated cost
pool, to products

Basis of
Overhead
Rates
A production
volume related
activity
measure, e.g.,
direct labor
hours or dollars,
machine hours,
etc.

When Applicable

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
Single Rate
Per
Department

Type of
Allocations
Number of
Stages

Basis of
Overhead
Rates

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

When Applicable

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

Multiple
Activity Based
Rates Per
Department

From service
departments, to
producing
departments' activity
cost pools, to
products

Basis of
Overhead
Rates

When Applicable

Both
production
volume
related and
nonproduction
volume
related
activity
measures,
e.g., number
of purchase
orders,
number of

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

Oracles Cost Elements

Material

Material Overhead

Resource
Resource

Overhead

Outside
processing

Oracle Cost Elements

Material 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
Overhead Cost
Elements

Material
Material
overhead
overhead

Resource
Resource
overhead
overhead

Material
Material
Mgmt
Mgmt

Facility
Facility

Overhead Cost

Freight-In
Freight-In

Benefits
Benefits

Sub-Elements

Production
Production
Control
Control

MFG
MFG
Engng
Engng
Indirect
Indirect

Presentation Agenda
1. Assess & Design
Overhead Allocation Methods
Standard Cost Overhead Sub-elements

2. Oracles Overhead Application Basis Types

3. Cost Pool Allocation Process
4. Using Oracles MassBudgets &
AutoAllocations
5. Questions & Answers

Oracle
Application 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 Application
Basis Type (Example)
Overhead Cost
Elements
Overhead Cost
Sub-Elements
And
Application
Basis Types

Material
Material
Overhead
Overhead

Resource
Resource
Overhead
Overhead

Matl
Matl Mgmt:
Mgmt:

Facility:
Facility:

Activity:
Activity:
PO
POProcess
Process

Resource
ResourceValue
Value

Freight-In:
Freight-In:

Resource
ResourceValue
Value

Total
TotalValue
Value
(Buy
(BuyItems)
Items)

Prod.
Prod. Control
Control
Activity:
Activity:

Planning
PlanningProcess
Process

Benefits:
Benefits:

MFG
MFG Engng:
Engng:

Resource
ResourceUnits
Units

Indirect:
Indirect:

Resource
ResourceValue
Value

Oracles Overhead
Application Method (Example)
Material
Overhead

Resource
Overhead

Activity

Application
Basis Type

Method of
Applying
Overhead

P.O.
Process

Activity
(Number of POs)

Amount per Item

Based on Activity

Total Value
(Buy Items)

Single Rate
( Buy Items Only)

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

Material
Management
Freight-In
Production
Control

Planning
Process

Overhead Rates Assigned

Overhead Cost Applied

To Item (Example)

Need Overhead Cost Pools

Material Overhead

Resource Overhead

Material
Management

Freight-In

Production
Control

Facility

Benefits

MFG
Engineering

Indirect

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)

???

???

Resource
Units
(Std Hours)

Resource
$ Value

$$

Overhead Cost Pools Dollar$

???

???

???

???

???

Activity / Volumes
Number of
Purchase
Orders

Total $
Value of
Buy Items

Number of
Work
Orders

Resource $
Value

Resource $
Value

Rates or Amounts
$$

$$

Presentation Agenda
1. Assess & Design
Overhead Allocation Methods
Standard Cost Overhead Sub-elements

2. Oracles Overhead Application Basis Types

3. Cost Pool Allocation Process
4. Using Oracles MassBudgets &
AutoAllocations
5. Questions & Answers

Cost Pool Allocation

Step-Down Allocation
Indirect Overhead
Administration
Budget

Facility
Budget

Finance & IS
Budget

Manufacturing Organization
Departmental Budget

Material Overhead
Cost Element Pools
Material
Mgmt

Freight-In

Production
Control

Overhead
Cost Element Pools
Facility

Benefits

MFG
Engng

Indirect

Cost Pool Allocation

Many Departments

A d m in is tr a tio n
B u d g e t

F a c il it ie s
B u d g e t

F in a n c e & IS
B u d g e t

H u m a n
R e s o u rc e s

M a n a g e r
o f F a c ilit i e s

V P F in a n c e
a n d C F O

P r e s id e n t & C E O

E q u ip m e n t
M a in te n a n c e

A c c o u n tin g

V P L e g al

B ld g . &

G ro u n d s

P a y r o ll D e p t

In fo r m a tio n S y s te m s

Cost Pool Allocation

Many Departments
M a n u fa c tu r in g O p e r a tio n s
VP M FG

M a te r ia l
M anagem ent

P r o d u c tio n
C o n tro l

M a n u fa c tu r in g
E n g in e e r in g

F a b r ic a t io n
D e p a r tm e n ts

A s s e m b ly
D e p a r t m e n ts

P u r c h a s in g

P la n n in g

P ro ce ss
E n g in e e r in g

M e ta l

PCB

R e c e iv in g

S h o p F lo o r
C o n tr o l

In d u s tr ia l
E n g in e e r in g

P la tin g

S u b -A s s e m b y

W a r e h o u s in g
& S h ip p in g

F in a l A s e m b ly

Test

P a c k in g

Cost Pool Allocation

Indirect Overhead
What Is The Process?
Administration
Budget

Facility
Budget

Finance & IS
Budget

Manufacturing Organization
Departmental Budget

Material Overhead
Cost Element Pools
Material
Mgmt

Freight-In

Production
Control

Overhead
Cost Element Pools
Facility

Benefits

MFG
Engng

Indirect

Summarize
Agenda Items 1-2-3
1. Assess & Design
Overhead Allocation Methods
Standard Cost Overhead Sub-elements

2. Oracles Overhead Application Basis Types

3. Cost Pool Allocation Process
4. Using Oracles 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
Oracles cost elements: MOH & ROH
Oracles application Basis Types
Step-down allocation process

Presentation Agenda
1. Assess & Design
Overhead Allocation Methods
Standard Cost Overhead Sub-elements

2. Oracles Overhead Application Basis Types

3. Cost Pool Allocation Process
4. Using Oracles MassBudgets &
AutoAllocations
5. Questions & Answers

Oracles MassBudgets
Definition
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. MassAllocations

What is the Difference?
Same Functionality
MassAllocations Balance Types:
Actual
Encumbrance

MassBudgets Balance Type

Budget only

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

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 a
MassBudget 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

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 Button

2. 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.

Understanding
Oracles Formula Syntax

OR

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)

Presentation Agenda
1. Assess & Design
Overhead Allocation Methods
Standard Cost Overhead Sub-elements

2. Oracles Overhead Application Basis Types

3. Cost Pool Allocation Process
4. Using Oracles MassBudgets &
AutoAllocations
5. Questions & Answers

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.

AutoAllocation Process
Step 1:
Define
AutoAllocation Set

Step 2:
Submit AutoAllocation

Step 3:
Review Status
of AutoAllocation

Step 4:
Post Generated
Journals

Step1
Define AutoAllocation Set

Step 2:
Submit AutoAllocation Set

Step 3:
View Status of AutoAllocation Set

View Status for each Step

Now Lets Put It All Together

Example
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 Lets Put It All Together

Example
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 Sequence
1.

Administration
Budget

2.

Finance & IS
Budget

Facility
Budget

Facility Overhead Cost Pool

3.

4.

Manufacturing
Indirect Departments

Metal

Plating

PCB

Manufacturing
Production Departments

Sub-Assembly Final Assembly

Test

Packing

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 a
MassBudget 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.

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.

Administration
Overhead Allocation
01 = Company
800 = Administration Parent
Parent
T = Total All Departments HCNT = Headcount
8200 = MassAllocations Out

Account
01-800-7000
Summary Account

C-C-C

01-T-HCNT

C-L-C

01-T-HCNT

8100 = MassAllocations In

Currency

Amount
Type

Relative Period

USD

PTD or
YTD

Current Period

STAT

PTD

Current Period

STAT

PTD

Current Period

USD

PTD

Current Period

USD

PTD

Current Period

Company-Department-Account

7000 = Total Expense

C-S-C
T:

01-T-8100
C-L-C

O:

01-530-8200
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 & IS
Overhead Allocation

01 = Company
700 = Finance & IS Parent
T = Total All Departments HCNT = Headcount
8200 = MassAllocations Out

Account

Currency

Amount
Type

Relative Period

USD

PTD or
YTD

Current Period

STAT

PTD

Current Period

STAT

PTD

Current Period

USD

PTD

Current Period

USD

PTD

Current Period

Company-Department-Account

01-700-7000
Summary Account

C-C-C

01-T-HCNT

C-L-C

01-T-HCNT

7000 = Total Expense Parent

8100 = MassAllocations In

C-S-C
T:

01-T-8100
C-L-C

O:

01-700-8200
C-C-C

Facility Expense (OH)

Allocation Basis
Allocation Basis
Square Footage per Department

Facility
Overhead Allocation

01 = Company
840 = Facility Parent
7000 = Total Expense Parent
T = Total All Departments SQFT = Square Footage 8100 = MassAllocations In
8200 = MassAllocations Out

Account

Currency

Amount
Type

Relative Period

USD

PTD or
YTD

Current Period

STAT

PTD

Current Period

STAT

PTD

Current Period

USD

PTD

Current Period

USD

PTD

Current Period

Company-Department-Account

01-840-7000
Summary Account

C-C-C

01-T-SQFT

C-L-C

01-T-SQFT
C-S-C

T:

01-T-8100
C-L-C

O:

01-840-8200
C-C-C

AutoAllocation Process
Step 1:
Define
AutoAllocation Set

Step 2:
Submit AutoAllocation

Step 3:
Review Status
of AutoAllocation

Step 4:
Post Generated
Journals

Submit AutoAllocation Set

Questions & Answers

Michael Anenen
SSi North America
(312) 755-8257
Michael.Anenen@us.ssiworldwide.com
Paul Kraskiewicz
SSi North America
(312) 755-8262
Paul.Kraskiewicz@us.ssiworldwide.com