In this blog we will explain what Oracle HCM Cloud Payroll costing functionality is; and how the cost allocation flex-field and the cost hierarchy is defined within Cloud payroll.
Oracle Cloud Payroll processes create costing and offset results for the payroll run and payments you process. For example, when calculating the payroll, the application typically costs a value in a salary run result as a debit to an expense account, and offsets the same amount as a credit to a payroll liability account. The same information is then transferred to GL for the accounting purpose. Payroll costing integrates components required to accurately report labor costs and generate journal entries for your payroll run results and payments.
As far as Cloud Payroll is concerned, the accounts that are related to the costing feature are the Payroll Account as well as the General Ledger Account. Following are some of the other accounts which are configured to provide the costs pertaining to certain areas, e.g.:
- Cost Account – It is the account where each cost entry is recorded.
- Offset Account -It is the account where the excess or unused amounts are recorded. Usually interest from this amount is used to pay off the principal of any loans taken.
- Natural Account – It is the actual account by which the company determines how the expenses and costing takes place.
- Suspense Account – It is the account which is not viewable by external parties for audits or other purposes. It is an internally used account which is used when a transaction takes place that the accountant does not know in which account to place.
- Priority Accounts – It is special accounts with certain privileges depending on when and where such an account is created.
Now to create these accounts Oracle cloud payroll offers the functionality to replicate the chart of accounts flex-field structure as a cost allocation flex-field. it is advisable to have a similar structure as that of the Accounting Flexfield.
Cost Allocation Key Flexfield:
The cost allocation key flexfield creates a structure for financial accounting of your payroll costs. The flexfield captures the account codes you use to create accounting entries, and to report and track your labor costs.
To define the structure of the cost allocation flex-field you use the Manage Cost Allocation Key Flexfield task in the Setup and Maintenance work area. The structure of the flexfield defines the segments to include, their order, and the value sets to validate the data entered in the segments.
As a best practice, create a structure based on the structure of the Accounting flexfield used for the chart of accounts that receives the payroll costing entries. Use a similar sequence of segments and naming conventions to facilitate setup. Once the structure is defined, please deploy the flexfield, the following figure illustrates how the column heading and segment label make the company account information available for entry on the Manage Costing of Payroll page.
Cost hierarchy represents the different levels at which you can enter cost information. The level at which you enter costs is a key determinant in how the application builds the account number. The application starts with the lowest level (element entry) and ends with the highest level (payroll), checking for a value at each level until a value is found.
The following figure shows the different levels of the costing hierarchy.
At the person level, costing details at the payroll relationship level apply to all the person’s elements unless overrides are specified for the person at the terms and assignment levels. For person element, the level checked depends on the level specified in the element definition. For example, most deduction elements are defined at the payroll relationship level and earnings elements at the assignment level.