What are Allocation Ratios?

How is the Ratio Defined?

An allocation ratio is maintained, or determined, by the postings made to a ratio account, or range of accounts. So, when you define an allocation ratio you must identify the ratio accounts. These are often memo accounts.

The transactions posted to the ratio accounts are used to determine the ratio amount. The allocation ratio definition identifies the transactions to be retrieved for the ratio accounts. These transactions are then summed to find the ratio amount. For example, you might retrieve the year-to-date transactions, or the current period transactions, for the ratio account.

This ratio amount is then applied to the source amount of the allocation to determine the target posting amount. It is applied in one of the following ways according to the ratio basis chosen:

Fixed Amount

A fixed amount ratio is used to allocate the same value each time the allocation is run. The ratio amount calculated from the ratio account transactions is used as the allocation amount. In this case, the source amount is not used.

For example, you might want to allocate the first GBP 1500 of building maintenance costs to head office and then apportion the remainder using predefined percentages. To define the fixed amount allocation, you would post a value of GBP 1500 to the Building Maintenance Allocation Ratio memo account. This is the ratio account referenced on the allocation ratio.

Absolute Percentage

If the basis for allocation does not vary from month to month, a fixed percentage allocation can be used. This allows costs to be split by predefined percentages.

When the absolute percentage ratio basis is chosen, the ratio amount calculated from the ratio account transactions determines the percentage of the source amount to be applied to each target account.

For example, to allocate 60% of the telephone costs to the sales department you might post a value of 60 to Telephone Costs Allocation Rate memo account. You might also enter the sales department code as an analysis code on this memo account posting. This ledger analysis dimension must be referenced in the allocation ratio as the Filter Selection Analysis Dimension.

Relative Percentage

The relative apportionment method allows you to apportion the source amount of an allocation according to the ratio between two other values, held elsewhere in the ledger.

When the relative percentage ratio basis is chosen, the ratio amount calculated as the total of the ratio account transactions is used as the total for the ratio calculation. The transactions selected from the ratio account are grouped and summed according to the analysis code filter selection criteria. The ratio calculation is as follows:

(Source Amount x Ratio Amount) / Ratio Total = Target Allocation Amount

An Allocation Ratio Example

The use of each ratio basis is best illustrated using an example.

The following postings would be made to the Head Count memo account, one posting for each department. The department code is entered into an analysis dimension on each transaction.

An allocation ratio is defined. The Head Count memo account is the ratio account. In the filter selection, ledger analysis dimension 1 is selected.

When the allocation is run, the personnel cost to be allocated for the period is GBP 200. This is the source amount.

Fixed Amount Ratio Basis

If the Ratio Basis on the allocation ratio is set to Fixed Amount, the amount to be apportioned to department 1 is GBP 20. This the amount posted to the ratio account for department 1.

Fixed Percentage Ratio Basis

If the Ratio Basis on the allocation ratio is set to Fixed Percentage, the amount to be apportioned to department 1 is:

Source Amount (200) x 20% = GBP 40

Relative Percentage Ratio Basis

In this case we want to allocate the personnel costs across the four departments, according to the relative head count in each department. The postings made to the Head Office memo account represent the number of staff in each department.

The Ratio Amount option of Balance could be selected in the ratio setup so that only the increase or decrease in head count needs be posted to each period.

The ratio total is the total head count of 50. This is calculated as the total of all the memo account transactions with an analysis code entered in ledger analysis dimension 1.

If the Ratio Basis on the allocation ratio is set to Relative Percentage, the amount to be apportioned to department 1 is calculated as:

(Source Amount x Ratio Amount for Dept 1) / Ratio Total = Dept 1 Target Allocation Amount

200 x 20 / 50 = 80