Cost Allocation in Production Cost Centers

Cost Allocation in Production Cost Centers

Introduction

Efficient cost allocation is crucial for accurate production cost tracking. This article explains how primary costs (e.g., rent, water, gas) are initially recorded in non-production cost centers, transferred to production cost centers via assessment and distribution cycles, and how these two methods compare.

Primary Cost Posting

Primary costs such as rent, water, and gas are initially recorded in non-production cost centers like administration. For example, if a company pays $10,000 in rent for a factory, this cost is posted under a primary cost element in an administrative cost center.

Cost Allocation via Assessment

To allocate these costs to production cost centers, an assessment cycle is used. This process moves costs from non-production to production cost centers through an allocation structure, where primary cost elements are defined and mapped to secondary cost elements for distribution. However, this method replaces the original primary cost element with a secondary one, making it difficult to track specific cost components in production.

Cost Allocation via Distribution

An alternative method is the distribution cycle, which moves costs from non-production to production cost centers while retaining the original primary cost element. This provides greater cost visibility and traceability, ensuring that each production cost center reflects the true nature of the expenses.

Using Statistical Key Figures (SKF) for Allocation

Costs are distributed based on Statistical Key Figures (SKF) such as:

• Area occupied (sqm)
• Number of employees

Example:

Assume a factory with two production cost centers:

• Cost Center 1: 2000 sqm, 100 employees
• Cost Center 2: 3000 sqm, 150 employees

If rent ($10,000) is allocated by area:

• Cost Center 1: (2000/5000) × $10,000 = $4,000
• Cost Center 2: (3000/5000) × $10,000 = $6,000

If water costs ($2,000) are allocated by employee count:

• Cost Center 1: (100/250) × $2,000 = $800
• Cost Center 2: (150/250) × $2,000 = $1,200

Assessment vs. Distribution Cycle

Feature Assessment Cycle Distribution Cycle Type of Costs Primary + Secondary Primary Only Cost Element Uses a single secondary cost element Retains original cost element Cost Visibility Less detailed More detailed Typical Use Case Overhead allocation (e.g., IT, HR) Direct cost sharing (e.g., utilities, rent)

Assessment Cycle Process

1. Define SKF (e.g., area, employees) in the system.
2. Configure the assessment cycle with sender (administrative) and receiver (production) cost centers.
3. Execute the cycle to allocate costs.
4. Analyze cost reports, noting that primary cost elements are replaced with secondary ones.

Distribution Cycle Process

1. Define SKF (e.g., area, employees) in the system.
2. Configure the distribution cycle with sender (administrative) and receiver (production) cost centers.
3. Execute the cycle to allocate costs while keeping the original primary cost element.
4. Analyze cost reports, ensuring that primary cost elements remain visible in the production cost centers.

Conclusion

Assessment cycles streamline cost allocation but obscure direct tracking of primary costs by replacing them with secondary cost elements. In contrast, distribution cycles preserve the original primary cost elements, ensuring greater transparency and traceability. Organizations should select the appropriate method based on their reporting accuracy requirements and internal financial management strategies.