All indirect costs need to be allocated to the appropriate cost objects during the closing process irrespective of the industry.

In general, two main types of allocations are noticed in upstream companies:

  • First: Recover the costs of operations from partners and equitably spread the costs among the joint ventures i.e. JVA Allocations
  • Second: Allocation of corporate cost following the OECD (Organization for Economic Co-Operation and Development) guidelines.


Let’s understand these two types of allocations.


First – JVA Allocations: Recover the costs of operations from partners and equitably spread the costs among the joint ventures.


  • Joint Operating Agreements (JOA) & Business units are the decision makers for these type of allocations.
  • The fact what cost is recoverable is quite important here to understand and if the situation appears where government is part of the contracts then the Joint Operating Agreements (JOA) & Production sharing contracts (PSC) governs the recoverable costs.
  • Ultimate bottom-line in this case would be to bill the appropriate ventures.



Following could be the example of the costs that can be allocated using this allocation process:


  • Vehicle Usage
  • Lease Operating Expenses (LOE)
  • Facility Expenses (FE)
  • Area Administration costs (AAC)
  • Insurance etc.

Now we might have a questions what are the drivers used in these type of allocations:


The allocation drivers in this case would be:

  • Well Count
  • Oil or Gas throughput
  • Water production or
  • a combination of items

How do we handle this in SAP


As we have spoken about Joint Venture so it is certain that we need to use the Joint Venture Allocation Cycles (be it Assessment or Distribution based on the basic principle whether business wants to post costs using a secondary cost elements or post back to the primary cost elements).

Transaction Code to be used:

  • Create the JVA Actual Assessment Cycle – Transaction Code GJF1
  • Change the JVA Actual Assessment Cycle – Transaction Code GJF2
  • Display the JVA Actual Assessment Cycle – Transaction Code GJF3
  • Execute JVA Actual Assessment Cycle – Transaction Code GJF5
  • Create the JVA Actual Distribution Cycle – Transaction Code GJG1
  • Change the JVA Actual Distribution Cycle – Transaction Code GJG2
  • Display the JVA Actual Distribution Cycle – Transaction Code GJG3
  • Execute JVA Actual Distribution Cycle – Transaction Code GJG5

JVA Allocations utilize recovery indicator manipulation rules to drive costs appropriately. So we will notice Recovery Indicator & Manipulation Rule fields in a JVA Assessment/Distribution Cycle Master Data.

MEC Allocation Tasks for Upstream Companies1.jpg

Refer below in case you want to know what is Recovery Indicator & Manipulation Rule:


  • Recovery Indicator: The particular recovery indicator assigned to a posting line determines whether the expense is billable to partners. It can be like Billable expense, Billable adjustment, Non-billable expense, Suspense expense, Suspense adjustment etc.


  • Manipulation Rule: This is to define the rules that will control how recovery indicators will be assigned to the records of sending and receiving cost objects during allocations.

Second: Allocation of corporate cost following the OECD guidelines


The type of corporate costs need to be allocated in this case could be:

  • Regional Infrastructure
  • Time writing
  • Shared service costs etc.

Different drivers can be used in order to allocate different type of costs in this case i.e.

  • Regional Infrastructure – SKF i.e. Headcount or Square feet
  • Time-writing could be based on percentage
  • The allocation drivers for Shared Service costs can be: production barrels, Capex/Opex, reserves, etc.

How do we handle this in SAP


In this case Controlling Allocation cycles (Assessment or Distribution) are used. Transaction Code to be used are:

  • Create Actual Assessment Cycle – Transaction Code KSU1
  • Change Actual Assessment Cycle – Transaction Code KSU2
  • Display Actual Assessment Cycle – Transaction Code KSU3
  • Execute Actual Assessment Cycle – Transaction Code KSU5
  • Create Actual Distribution Cycle – Transaction Code KSV1
  • Change Actual Distribution Cycle – Transaction Code KSV2
  • Display Actual Distribution Cycle – Transaction Code KSV3
  • Execute Actual Distribution Cycle – Transaction Code KSV5

A generic question pops up sometimes i.e. Which SAP Modules are used for implementation in these cases:

  • Financials (FI)
  • Controlling (CO)
  • Joint Venture Accounting (JVA)
  • Time & Expense (T&E)
  • CATS


Challenges in Maintaining & Executing Allocation Cycles:


  • Sender & Receiver Cost Center groups, Cost Element groups must be updated regularly to reflect correct mapping and proper allocation.
  • Revisiting the Allocation Cycles Master Data to ensure the information’s are correct.
  • Huge volume of data to handle.
  • Month End Closing performance issues (Longer execution times because of comparatively larger Cycles Master Data i.e. many segments in a particular cycles)
  • Validation of data from external sources i.e. multiple SKF quantities are derived from external sources for corporate cost allocations.
  • There can be situations where receiver cost object in first cycle can be sender in second cycle and again receiver in second cycle can be sender in third cycle and so on. These types of cases are generally referred as tiered allocations and business always has difficulty to find out the actual source cost elements (i.e. different primary costs) from the subsequent cycles.
  • Manual reconciliation of Cost Allocation becomes quite tedious and time consuming task due to non-availability of standards automated tool in system.
  • Breakdown of allocation details with specific information (i.e. as per sender/receiver company codes, types of expenses, JV for Sender/Receivers.


Important considerations:


  • All primary costs i.e. first spent must be recorded before we execute the allocations so that receiver share can be billed accordingly.


  • Consideration must be given for the ordering/sequencing of cycles & allocation of costs at execution to make sure that no costs remain un-allocated after month end close.


  • Prior month allocations cannot be reversed using the SAP reversal functionality once the period is closed.  Only posting a manual entry in the current month would be the option in case any correction to a prior month is needed.
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