Cross charging occurs when a company has multiple divisions or departments that share labor costs. Although one division is typically responsible for the profit and loss associated with a project, sometimes team members from other divisions perform the actual work.
However, since you can account for a project’s labor costs only once without artificially inflating project costs, your company must establish a process for handling the accounting to ensure that books are both accurate and compliant.
In this article, we’ll explore the pros and cons of the three options for handling cross charging in Costpoint.
Cross Charging Considerations
There are a few things to consider before we dig into the options. Your answers to these questions will help you identify the best solution for your company.
- Who should collect the revenue? Most likely, the responsible division, or the “Owning Org,” is the one responsible for the project profit and loss. The Owning Org typically manages the lion’s share of the project, although this isn’t always the case. Similarly, the “Performing Org” is the division that performs the work in question, but they are only responsible for the work, not the resulting revenue.
- Who is responsible for coding the work correctly? Either the employee or the accounting team will be responsible, and we’ll explore this further below.
- Which features of Costpoint are you using? The options below vary depending on if you use Multi-Entity or Multi-Currency, so it is key to know this upfront.
Cross Charging Options in Costpoint
Ultimately, Costpoint features three ways to handle cross charging, and this post, coupled with your answers above, will guide you to the right option for your company.
Option 1 – Employee Responsibility
If you are using Multi-Entity and need the fastest costing possible, then this option is solid. The employee must select the proper organization when they’re filling out their timesheet. You will be able to pull daily reports, which means that if the employee makes the correct selection, your costing will be highly accurate and rapidly available.
Putting the responsibility on the employee is a good option when cross charging in your company is infrequent, you have a smaller company, and you trust employees to make the right selection.
The potential cons are that this method relies on the employee, and this only works with Multi-Entity (not Multi-Company).
Option 2 – Revenue Redistribution
Costpoint Multi-Entity offers a Revenue Redistribution process that allows your company to move the costs from the Performing Org to the Owning Org. You can run this process once a month for accurate financial reports, but it does not update employee timesheets or expense vouchers.
Revenue redistribution may be right for you if you do not want to rely on the employee, want both the owning and performing organizations to be able to run reports, and want accurate financial reports for both divisions.
There are two potential downsides with this method. First, you must be aware that cross charging only shows up correctly on financial reports and not in the timesheet or accounts payable voucher history. Secondly, this is an option for Multi-Entity only, so if you use Multi-Company, this will not work for your company.
Option 3 – Inter-Company Work Order (IWO)
Using IWOs to charge costs between organizations or divisions creates entries that clearly define which costs are “due to” and “due from” each organization. The resulting net-zero charges ensure that your company does not double charge clients for labor costs.
Although set up for this approach can be complicated, and it requires additional steps to complete processing, it is the most automated approach. Moreover, it works with both Costpoint configurations, so it’s an option whether you use Multi-Company or Multi-Entity.
The Bottom Line
When it comes to cross charging, Costpoint has three options to ensure your books are compliant. If you are ready to set up one of these processes or need guidance on the best choice for your company, please reach out to us today. We’d love to get you on the right track!