Calculation of Cost of Capital - Cost Accounting

The purpose of the process is to find rules for, and calculate cost of capital.

Cost of capital is used in cost accounting to allocate costs of bound capital to the responsible departments/cost centers.

This is done by internally calculating the cost of capital for a department's bound capital. This cost of capital will be a cost for each department but a revenue for the company. From an external point of view, these transactions do not affect the company's balance sheet or income statement.

Before you start

FAM function CA01 is defined in 'FAM Function. Open' (CRS405).
Accounts for debit and credit of cost of capital are defined in 'Accounting Identity. Open' (CRS630).
Rules for the calculation of cost of capital are defined in 'Cost of Capital Calculation Rule. Open' (CAS010).

Follow these steps

Calculate Cost of Capital

The cost of capital is calculated for accounts with a defined cost of capital rule in 'Cost of Capital. Calculate' (CAS110).
Review and Confirm Cost of Capital Proposal

The result of the cost of capital calculation can be printed as a proposal for review in 'Cost of Capital. Calculate' (CAS110). If the proposal can be accepted, you confirm it and thereby update the general ledger.

Description

This example shows how the cost of capital is used in cost accounting.

A particular company has taken out a loan to buy machinery. If this money had instead been placed in a bank account, the company would have earned interest on their capital. Instead, the company pays interest on the loan to the bank.

For this reason, the company allocates the costs of the capital bound by machinery as a standard cost – cost of capital – for all cost centers concerned. Because this cost is written as corresponding interest income, the result becomes 0 seen from outside the company.

This example presupposes that the cost of capital is recorded on the cost center level. This is not possible in some cases. If the company still wants to record cost of capital on its departments, the function is used together with allocations.

All cost of capital is first recorded on a common cost center. The allocation function then divides up the common cost center's calculated cost of capital to each respective cost center. See the following model:

This is the case when the cost of capital is calculated first and then allocated.