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But are the financial charges allocated by BU or they are charged to consolidated P&L. Just think what would be the case with telephone charges. I mean they wont be allocated. Please correct we if I am wrong.
Good question..
Allocation of interest to various businesses must be based on the utilisation of borrowed funds by each unit. Suppose, M/s ABC Ltd. has3 businesses A, B, C.. Let's say the total interest cost for M/s ABC Ltd. for FY2013 is $30 million. The total outside loans taken by the unit let it be $3000. Out of this $3000, $2000 was used by A, $500 by B $500 by C
Then Interest expense for A must be $200
B $50 and C $50
If any borrowings is commonly utilised, then it must be equally apportioned
I fully endorse the answer submitted by SHEMEEM'S.
The answer below is on the right track. You could also go into much more detail seeing the interest rate charged on each loan taken.
The allocation of the any cost should be according to the relationship between the cost and the related party. If there is direct relation so the allocation should be according to the share ratio of party from the total this cost, but if the relation is not direct, it could be according to the unit's share ratio from total activity of the company such as revenue.
The example of SHEMEEM S is good example for direct allocation, but if the loan is not related for any unit, we can use the unit's share ratio from total activity of the company such as revenue.
The allocation of "Bank interst charges" is brought about as per proportion of the borrowed fund utilized in every business unt.
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