Example of Using Expense Pools and Cost Element Groups to Calculate Overhead Absorption

Scenario

Your cost organization is a bicycle retail store with:

Monthly overhead costs of 10,000 USD for rent 500 USD for water, 1,500 USD for electricity, and 1,000 USD for gas.
Additional costs of 50 USD freight per incoming receipt; and 10 USD inspection fees per unit.

You want to calculate overhead absorption for 5 transactions during the month:

2 receipts of bike X
3 receipts of bike Y

Transaction Details

You combine the water, electricity, and gas costs into one utility expense pool of 3,000 USD. Then define the expense pools on the Manage Overhead Expense Pools page as described in this table.

Expense Pool	Cost Element
Rent	Warehouse Overhead
Utilities	Warehouse Overhead
Freight	Freight Overhead
Inspection	Warehouse Overhead

Next, define a Materials cost element group on the Manage Overhead Cost Element Groups page. You use this cost element group to calculate overhead costs as a percentage of material costs. Your material costs are:

500 USD per unit for bike X
300 USD per unit for bike Y

Finally, you want overhead costs to include cost organization administrative and inventory organization facilities costs.

Analysis

Define the overhead accounting rules and absorption rates so that, for each month, the total amount absorbed by the transactions equals the overhead expense pools.

This table describes the overhead accounting rules and absorption rates:

Overhead Accounting Rule	Transaction Group	Transaction Type	Item or Item Category	Expense Pool	Cost Element	Cost Basis	Based On Cost Element Group	Rate
Rule1	Purchase Order Transactions	Purchase Order Receipt	Item Bike X	Rent	Warehouse Overhead	Per unit	Not Applicable	150
Rule2	Purchase Order Transactions	Purchase Order Receipt	Item Bike X	Rent	Warehouse Overhead	Per transaction	Not Applicable	500
Rule3	Purchase Order Transactions	Purchase Order Receipt	Item Bike Y	Rent	Warehouse Overhead	Percentage	Materials	45%
Rule4	Purchase Order Transactions	Purchase Order Receipt	Category Bike	Utilities	Warehouse Overhead	Percentage	Materials	12%
Rule5	Purchase Order Transactions	Purchase Order Receipt	Category Bike	Freight	Freight Overhead	Per transaction	Not Applicable	50
Rule6	Purchase Order Transactions	Purchase Order Receipt	Category Bike	Inspection	Warehouse Overhead	Per unit	Not Applicable	10
Rule7	Purchase Order Transactions	Purchase Order Receipt	Category Bike	Administrative	Warehouse Overhead	Percentage	Materials	5%
Rule8	Purchase Order Transactions	Purchase Order Receipt	Category Bike	Inventory Organization Facilities	Warehouse Overhead	Percentage	Materials	5%

Note: The value type in the Rate column is determined by the Cost Basis column. All Rate values not listed as percentages are in the currency of the applicable cost book.

Resulting Overhead Costs

The following table describes the overhead cost calculations based on the rules defined.

Transaction	Item	Quantity	Rent	Utilities	Freight	Inspection	Cost Organization Administrative Costs	Inventory Organization Facilities
1	Bike X	10	2,000	600	50	100	250	250
2	Bike X	15	2,750	900	50	150	375	375
3	Bike Y	10	1,350	360	50	100	150	150
4	Bike Y	15	2,025	540	50	150	225	225
5	Bike Y	10	1,350	360	50	100	150	150
Total Overhead Absorption	Not Applicable	Not Applicable	9,475	2,760	250	600	1,150	1,150