Allocations and Strategic Cost Management

Allocations are traditionally a sweet spot for Essbase and MTG. This is one of the most common applications for Essbase.

To understand and control costs you need to distinguish between fat and bone. Direct costs can be easily attributed to specific revenue streams. However, that’s not true of indirect costs.

On one hand some expenditures support activities that are critical for revenue generation and high quality delivery of your products and services. Other expenditures may be unnecessary or inefficient. To make that distinction you must understand your cost drivers and allocate indirect costs based on sound economic logic. Allocations are a fundamentally multi-dimensional activity and Essbase’s multi-dimensional data structure is the ideal place to perform allocations.

Allocations systems tend to fall into three categories:

Simple allocations that use cost drivers to distribute indirect costs generated by non-revenue generating cost centers directly to revenue generating costs centers.

Water fall allocations based on a cascading hierarchy of cost centers. For example, layer 1 costs (e.g. the facilities department) are allocated to layer 2 ( e.g. the billing department ) and layer 2 costs are allocated to layer 3 (revenue generating activities).

Reciprocal allocations where (building on the previous waterfall example) some layer 2 costs must be allocated back to layer 1, producing a circular or reciprocal effect.