The allocation of expenses to activities

It's not an exact science; we need to find the best indicator

Almost all companies can separate their business into different products or services: based on their geographic market, distribution channel, product margin, etc. This is when we say that within the company there are different "companies." We will call each of these lines of business a branch of activity or simply an "activity.".

Understanding the contribution of each activity to the bottom line is vital for a company's survival, because sometimes some add value while others detract from it. By understanding how value is generated, we can make decisions to maximize it.

When we look for the result of each activity, the first thing we need is its income or sales; that is almost always very easy because we normally classify our products, services, and customers into families and subfamilies.

When we analyze expenses, we classify them into two types: direct and indirect. Direct expenses are those consumed entirely by an activity; these are straightforward. Indirect expenses are those shared by several activities. These expenses must be distributed and allocated to each activity in some way. We always look for the best indicator of how much each activity consumes of the expenditure. Let's look at some examples:

– The lease of the business premises: It is normally divided and allocated among the activities according to the square meters they occupy, distinguishing a different price between offices, warehouse or yard.

– The accountant: Normally, their cost is allocated to the activities based on the number of entries that each one produces.

– Electricity consumption: It is usually charged according to the maximum power of the machinery used for each activity.

There are other indicators: number of employees, number of users, number of software licenses, number of telephone extensions, etc. When we don't know how to allocate and attribute an expense, we use billing, because by default, those with a higher volume of business consume more.

This is one of the most sensitive parts in the implementation of a management control.

  Pau Riera. Financial Area

  Àmbit Assesor

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MGI Àmbit

A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.

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