How Expense Pools, Cost Element Groups, and Overhead Accounting Rules Fit Together

Use expense pools, cost element groups, and overhead accounting rules to calculate overhead absorption for inventory transactions. Overhead expenses can be absorbed and capitalized into inventory, or they can be absorbed and reclassified as an expense.

Overhead Costs Expensed or Capitalized

On inbound transactions and inventory transfer transactions, overhead expenses can be absorbed and capitalized into inventory value, or the absorption can be redirected to an expense account: a credit to an absorption account and a debit to either an inventory or expense account. On outbound transactions, overhead absorption is redirected to an expense account, and will be included in the gross margin calculation.

For example, consider a receipt of inventory items that cost $10 each to purchase, and you would like to absorb overhead cost of $2 each on the inbound transaction. When the item is sold, you would like to absorb additional overhead of $3 each on the outbound transaction. The total cost of goods sold is $15 each.

Expense Pools

Expense pools represent a collection of general ledger expense accounts that can be absorbed as overhead costs. Expense pools are defined at the cost organization level. Overhead rules are defined for expense pools, and an expense pool can have many overhead rules that absorb it.

Expense pools are mapped to a cost element, and a cost element can contain one or more expense pools. When overhead is absorbed, an accounting distribution is created for each expense pool, so you can define accounting rules crediting the absorption account at the expense pool level. Once the inbound transaction is in inventory, the application tracks the value of inventory at the cost element level, so that you can track costs through inventory at the desired level of granularity.

Cost Element Groups

Cost element groups tell the processor which cost elements to sum when the overhead rule is a percentage of cost. Cost element groups can be system defined or user defined, and they're set at the cost organization level.

There are two predefined cost element groups, Transaction Cost and Material. You can also define your own cost element groups.

Overhead Accounting Rules

The application uses the overhead accounting rules that you define to determine when and how overhead costs should be calculated. Overhead calculations are based on cost element pools or cost element groups.

Overhead accounting rules are defined at the cost organization book level. You can set the calculations to absorb overhead at the level of the cost organization, inventory organization, item category, or item.