Custom calculation of allocations for shared costs and revenue

Description

This function enables businesses to accurately distribute costs and revenues among various divisions, teams, or projects depending on their respective consumption, contribution, or other mechanism important to the user. The purpose is to provide a clearer and more accurate reflection of financial performance.

Example Use Case

Scenario: A multinational company uses its CPM software to manage the shared costs and revenues generated from its various departments such as marketing, sales, and production. The shared costs include utilities, rent, and administrative expenses. Similarly, the revenues may include earnings from various sales territories.

Solution: By leveraging the custom calculation of allocations function, the company can distribute the shared costs proportionally according to each department's usage or revenue contribution. For instance, if the marketing department uses more resources but generates less revenue, the costs allocated to that department would be higher. Similarly, a profit-making department like sales would have more revenue allocated to it.

Considerations

Many systems offer basic allocation functionality that will look at headcount across departments and spread IT costs or similar shared costs. This requirement is more detailed in that the system should accurately distribute costs and revenues according to user-defined variables and calculations. These may be different per department or exclude certain departments altogether.

Flexibility is important here, as allocation criteria will change as the business evolves. Assigning a rule for a period of time, then being able to change it moving forward, can be very powerful.

In complex organizations where departments provide services to each other (e.g., an IT department serving HR and Production), the sequence of allocation can become important. Here, one might use a step-down or reciprocal method to allocate costs in a sequence that recognizes interdepartmental services. If this is important to you, make sure to dig in.

Questions to Ask a Vendor

• Integration: How well does the allocation module integrate with other parts of the CPM system, particularly budgeting and forecasting?
• Flexibility: How can we apply unique allocation methods to different parts of the business?
• Steps: Can allocations be processed in a specific order?
• Dimensions: Can allocations be associated with specific dimensions, such as department, or are they hard coded?