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Resource allocation on P&L

Lynn McDee's Profile

2 separate divisions of one company whom are financially independent use some of the same resources. What would the process be to allocate these resources on a P&L and for KPI’s and incentive targets. Division A is about 60% of total company revenue, leaving 40% to Division B. Headcount is split 70% in A and 30% in B.

Answers

Werner Reisacher
Title: CEO
Company: Interlink Consulting
(CEO, Interlink Consulting) |

I like the way you correctly ask the question:
"what would THE PROCESS be to allocate...:
How the funds are to be allocated is driven by the number of processes that are involved and the value of these processes. The best way to get a clear picture of the situation, I would start with a meeting of all parties involved in these allocations, and come up with a flow chart of how the processes flow from between the divisions. (by departments/function such as purchasing/warehousing/billing/collection/payables/management supervision/maintenance etc.)
From there on, break down into processes, man-hours, hourly rates, etc.
Once you have agreed on these principles, you have eliminated the majority of the disputes that will come up in future performance and budget review meetings.
Once you agreed on the various allocation keys, I would prepare a spreadsheet that allows you to calculate the amounts to be allocated automatically every accounting period based on the new input for each cost driver.
Believe me, having an iron cast, undisputed allocation system signed up by all responsible parties is half the battle. Otherwise, the entire exercise will end up as an ongoing battle between "the accountant" and the rest of the company.

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