Allocations, Activity Based Costing and

Essbase Functions
By TopDown Team on February 1, 2012
One of the prevalent Costing models, primarily used in manufacturing is Activity-based Costing. Activity-based Costing or ABC gained popularity as Overhead and Indirect
Costs were scrutinized by management, production lines became more complex, and cost center managers were held more accountable for detailed product P&Ls and
overhead cost controls. Traditionally, a fixed percentage was applied to all products, service lines or segments to allocate Indirect Costs such as Rent expense, Depreciation
and Home Office salaries. Most companies these days, use some form of ABC methodology orResponsibility Accounting for internal management reporting, budgeting and
forecasting and sometimes for measuring the performance of departments, managers and divisions. This normally involves a pooling of costs at summary and cascading it
down to cost centers and SBUs through sometimes complex allocation spreadsheet models. In summary, cost allocations are done for any one of the following reasons:
Fully Loaded P&L statements by Customer, Product or Segment
Activity-based Costing (ABC)
Managerial Cost Accounting
Performance Measurement or Bonus Payout
Lets now explore how most allocations are performed in a Essbase cube. The steps are typically the following:
1. Determine the Total Amount to be allocated, i.e. Advertising Cost at Corporate HQ
2. Determine the Basis or Cost Driver for the allocation, for example, Unit Sold by Entity and Segment
3. Determine where the target range for the allocated amount, such as divisional rollups or individual cost centers
4. Establish the rule for spreading and calculate the percentage
In the most simplistic allocation model, cost drivers are first selected to determine the basis of the allocation, for exampl e, cost driver for allocating Rent Expense might be
Square Footage occupied by relevant cost centers. Other driver may be:
Headcount
Unit Sales
Unit Count
Labor Hours
The Basis or Cost Driver in this example is the Units Sold by Segment and Entity:

Lets assume, we want 50% of the Allocation amount to be allocated to TV Segments and Cost Centers based on Units Sold which is loaded to BegBalance in this case. This
is a multi-dimensional allocation and @MDALLOCATE function can be easily used as follows:
FIX(HSP_InputValue,Input,FY12,Local,Actual,Final)
Advertising =@MDALLOCATE (Corporate HQ->No Segment * .5, 2, @RELATIVE(USA,0),@RELATIVE(TV,0),Units->BegBalance, ,Share);
AGG(Entity,Segments);
ENDFIX
The first variable in the function is Allocated Amount, the second is the number of dimensions used in the allocation followed by the target distribution of the allocation. Units is
the Basis of the allocation and the last variable Share indicates an even distribution based on units sold. The allocation is done at Level0, thus, an aggregation is needed to
rollup the parent values.
Now, alternatively, the other 50% of the Corporate overhead is to be allocated to Digital Video segment, however, company wants to allocate a flat rate to each cost center that
happened to sell Digital Video regardless of volume, in other words, the allocation is based on Count of possible combination of Entity and Segment. In other words, the total
amount of $500,000 is spread evenly based on all entities/segment combinations that have units and the multi -dimensional allocation function is written like:
Advertising=@MDALLOCATE (Corporate HQ->No Segment * .5,2, @RELATIVE(USA,0),@RELATIVE(DV,0),Units->BegBalance,,Spread,SKIPMISSING);
Note that only the last 2 variables changed to make this happen, last one excludes Null values for the Units Sold in the combinations. There are other methods (next to last
variable) to be used in this function, such as Percent, Add, Subtract, Multiply and Divide.
Other combinations of these variables can yield different distribution of allocated amounts and sometimes to erroneous results, therefore, it is advisable to choose the allocation
criteria, drivers and methods carefully when dealing with the Essbase prebuilt allocation functions. Also note that this function is relatively costly in terms of memory usage and
calculation times, so apply the FIX/ENDFIX filters and increase Cache size when working with these functions.
Off course, these functions do not apply to all allocation concepts and sometimes custom code must be wri tten to calculate percentages and allocated amounts based on
percentages. For example, the first allocation can be written as:
FIX(HSP_InputValue,Input,FY12,Local,Actual,Final,@RELATIVE(USA,0),@RELATIVE(AllSegments,0))
Advertising =Corporate HQ->No Segment * .5 * (@CURRMBR(Segments)->@CURRMBR(Entity)->Units->Begbalance/Units->Segments->USA->Begbalance);
ENDFIX
A second pass through the database is required now to aggregate all segments and entities, so it takes more time to execute:
FIX(HSP_InputValue,Input,FY12,Local,Actual,Final)
AGG(Entity,Segments);
ENDFIX
And this assumes that the rates are already aggregated for BegBalance->Segments->Entity. The advantage of using the @MDALLOCATE function is that no pre-aggregation
of the total Basis is required and Essbase performs that at the same time is allocating in the memory. Plus there is less of clutter in the Calc Script, making it more efficient.
- See more at: http://blog.topdownconsulting.com/2012/02/allocations-activity-based-costing-and-essbase-functions/#sthash.uAu4yVvb.dpuf