1. Implementing Joint Venture Management
  2. Example of Using a Rate Based Overhead Method to Calculate Overhead

Example of Using a Rate Based Overhead Method to Calculate Overhead

In this example, a managing partner needs to set up an overhead method to calculate overhead based on the terms stipulated in the joint operating agreement, which states:

  • The units of water used in the joint venture operations is the basis for the overhead calculation.

  • Use $5 as the rate for each unit of water.

  • For each period, distribute overhead costs to joint venture partners with a minimum amount of $1,000 and a maximum of $2,000.

When setting up the overhead method for the joint venture, the managing partner specified the following details:

  • Effective dates for the overhead method.
  • The ownership definition to use for the distribution of the calculated overhead amount.
  • The operational measure type “Water” to use as the basis for the overhead calculation.
  • A rate of $5 to apply to the operational measure type for the overhead calculation.
  • A $1,000 minimum and $2,000 maximum overhead amount.
  • A period designation so that the overhead calculation is only on operational measures recorded for the period that you select when submitting the process to calculate overhead.

The managing partner ran the process to calculate overhead for the most recent period. The following table shows the details of the operational measures that the process identified for the overhead calculation:

Measure Type Measure Date Measure Value Unit of Measure Value Type
WATER 1/1/2021 2.0 Units Number
WATER 1/2/2021 2.0 Units Number
WATER 1/14/2021 9.0 Units Number
WATER 1/15/2021 15.0 Units Number
WATER 1/15/2021 8.0 Units Number
WATER 1/18/2021 45.0 Units Number
WATER 1/19/2021 79.0 Units Number
WATER 1/25/2021 35.0 Units Number
WATER 1/25/2021 13.0 Units Number
WATER 1/31/2021 6.0 Units Number
WATER 1/31/2021 20.0 Units Number

The process calculates the total units of water used, which is 234. It then multiplies this number with the rate specified, which is $5, to calculate the total overhead for the current period, January.

Total Measure Value Rate Calculation
234.0 $5 234.0 x $5 = $1,170.00

Because the total is above the $1,000 minimum and below the $2,000 maximum, the process creates a transaction with the overhead amount, which is viewable in the Joint Venture Source Transactions work area. This transaction can then be processed by Oracle Joint Venture Management to recoup the overhead amount from the joint venture partners.