An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.
Allocation is the act of distributing according to a plan. As per the dictionary allocate means to set apart for a special purpose; designate; distribute according to a plan. From an accounting context, it means a system of dividing overhead expenses between the various departments of a business. Figuratively, earmarked is often used in regard to monetary allocations although it is heard in other contexts as well.
The allocation also refers to a piece of the pie, a share in the profits, a portion of whatever is being divided up and parceled out usually money, but in an accounting context is applicable to account balances. This expression probably has its origin in the graphic representation of budget allotments in circular, pie-shaped form, with various sized wedges or pieces indicating the relative size of allocations to different agencies, departments, etc.
Mass allocations is a functionality offered by many automated systems and ERPs to distribute the account balances from one account to several others based on a formula or mathematic logic. Users can define a Mass Allocation formula to create journals that allocate revenues and expenses across a group of cost centers, departments, divisions, locations, and so on using any accounting dimension available. Users can include parent values in allocation formulas that can enable allocating to the child values referenced by the parent without having to enumerate each child separately.
The commonly used allocations can be grouped as follows:
Allocations can be used in various practical business situations. For example, consolidated rent paid can be allocated to another division based on the area of usage, or, a pool of marketing costs can be allocated to several departments based on the ratio of department revenues to total revenues. Some of the commonly used examples are:
In the example shown in the figure, we have a company which has taken a 1000 square feet office space on rent. The expenses for rent are borne by the head-office and payment to the landlord is also made by the head office. To know the true profitability of each of the departments (Department A, B & C) the rent needs to be allocated to each one of them.
Each department occupies different areas and the company has taken the measurement of the areas occupied by each of the departments. In the example shown here, the rent is being allocated to different departments based on their usage factor. This is an example of the concept of allocation and automated accounting systems help handle complex allocations programmatically.
Recurring Journals are for transactions that repeat every accounting period and allocation Journals are for single journal entry using an accounting or mathematical formula to allocate revenues and expenses across a group of accounting dimensions like cost centers, departments, divisions, locations, or product lines depending upon usage factors.
Global Business Services (GBS) Model
Global business services (GBS) is an integrated, scalable, and mature version of the shared services model. Global Business Services Model is a result of shared services maturing and evolving on a global scale. It is represented by the growth and maturity of the Shared services to better service the global corporations they support.
Matrix Organizational Structures
In recent times the two types of organization structures which have evolved are the matrix organization and the network organization. Rigid departmentalization is being complemented by the use of teams that cross over traditional departmental lines.
Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts.
Legal Structures for Multinational Companies
A multinational company generally has offices and/or factories in different countries and a centralized head office where they coordinate global management. A multinational company (MNC)is a corporate organization that owns or controls the production of goods or services in at least one country other than its home country.
GL - Understanding Chart of Accounts
A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA has transitioned from the legacy accounts, capturing just the natural account, to modern-day multidimensional COA structures capturing all accounting dimensions pertaining to underlying data enabling a granular level of reporting. Learn more about the role of COA in modern accounting systems.
Horizontal or Flat Organizational Structures
Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.
Divisional Organizational Structures
The divisional structure or product structure consists of self-contained divisions. A division is a collection of functions which produce a product. It also utilizes a plan to compete and operate as a separate business or profit center. Divisional structure is based on external or internal parameters like product /customer segment/ geographical location etc.
Introduction to Legal Entities Concept
Modern business organizations operate globally and leverage a large number of registered legal entities, and operate through complex matrix relationships. To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders. Learn more about Legal Entities and their importance for businesses.
An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.
Functional Organizational Structures
A functional organizational structure is a structure that consists of activities such as coordination, supervision and task allocation. The organizational structure determines how the organization performs or operates. The term organizational structure refers to how the people in an organization are grouped and to whom they report.
© 2023 TechnoFunc, All Rights Reserved