Production Cost Allocation

Module Guide: Production Cost Allocation

Module Location

PPIC > Production Cost Allocation

Module Objective

The Production Cost Allocation module is a cost accounting tool used to charge or allocate indirect costs or overhead costs to the value of Work-in-Process (WIP) inventory. This process is crucial to ensure that the total Cost of Goods Manufactured (COGM) of a product includes all relevant costs, not just direct material costs.

1. Main View (Allocation List)

The main page of this module displays a list of all production cost allocation documents that have been created.

View Explanation

• View: This page is a history of all cost allocation documents. You can see the Production Cost Allocation Code, the Month and Year of the allocation period, as well as the document's Status and Approval.

• Filters: You can search for a specific document by Allocation Code, a date range, or Item/Service Category (generally set to WIP).

• Action Buttons:

  • [New] (Not visible, but is the primary button): To create a new cost allocation document.

  • [Print Document]: To print the details of a selected allocation document.

2. Steps to Perform a Cost Allocation (Conceptual)

1. Create a New Document: From the Main View, click the [New] button to open the allocation form.

2. Define Period and Allocation Basis: On the form that appears, define the allocation period (month/year). You will then define the allocation basis (e.g., machine hours, labor hours, or material cost) and the total overhead cost to be distributed.

3. Run the Process: The system will calculate and distribute the total overhead cost to every active WIP item during that period, based on the defined allocation basis.

4. Confirm: After reviewing the allocation results, you will confirm the document to process its journal.

Workflow & Integrated Business Process

• Accounting Impact: After being confirmed and approved, this module will create a journal entry to increase the WIP inventory value (Debit: Work in Process) and credit the relevant overhead cost accounts.

• Importance of Allocation: This process ensures that costs such as factory electricity, machine depreciation, and factory supervisor salaries are fairly charged to the cost of each product manufactured.

Tips & Important Notes

• This is one of the key processes in manufacturing cost accounting and is usually performed at month-end as part of the book-closing process.

• The accuracy of the cost allocation directly impacts the accuracy of inventory valuation and the Cost of Goods Sold (COGS) calculation.

• This module is a crucial work tool for the Cost Accountant and Controller.