Before you deal with selecting diversity strategies and formulating a specific plan for each scenario, you need to decide what to do in general. The spacing of indirect factors for any object in any organization, like any other function, should be practical. You can reliably and directly include direct costs of a specific product (work, service) attributed to a particular accounting object. Direct costs form the actual cost, contained in 20 “Main production.” Overhead costs are additional expenses of the organization that are not directly related to the production of any product (with the provision of any service, the performance of specific work). These are associated costs associated with the condition, organization, and production management. They cannot be attributed directly to a particular type of product (work, service), so they are allocated to the cost following the chosen Methodology.
Legislative Definition of Overhead
In regulatory legal acts on accounting, there is no concept of “overhead costs” as such. The term overhead means approving the Methodology for determining the estimated cost of construction, reconstruction, overhaul, demolition of capital construction facilities, and work to preserve cultural heritage sites. The concept of “overhead costs” given by us above is not approved by law but rather follows from the practice of cost. It is a management accounting term, not an accounting term.
What Is Included in The Overhead?
Each organization decides this question independently based on what kind of expenses cannot be attributed directly to the cost price since they accompany the production of products (rendering services, performing work) but are not directly related to them. As a rule, overhead costs include salaries of administrative and managerial personnel and general production personnel. As well as insurance premiums accrued on wages to the Pension Fund, depreciation of fixed assets that are not directly involved in the production process, the cost of maintaining and repairing such fixed assets, rent for property not used now in the production process, for example, rent for an office or general production premises.
As we said above, overhead costs cannot be attributed to a specific type of product, work, or service. That is why they must be distributed to the cost price every month (or based on the results of another period), having approved a reasonable distribution method in the accounting policy. So, you can allocate overhead costs to the cost price:
- In proportion to the salary of production personnel.
- In proportion to the actual cost of raw materials and materials used in production.
- In proportion to the standard cost of products (works, services).
- In proportion to the proceeds from selling a specific type of product (work, service).
- In proportion to the sales volume (in quantitative terms), etc.
It would be best if you justified the distribution methodology, and it is most logical to link it to the prevailing indicator (determining) in the production of products (works, services). For example, if the central part of the cost of performing work is employees’ salary, then it is logical to link the distribution of overhead costs to the salary. If the rate of return byproduct varies greatly, the sales proceeds depend on the type of product. It is sometimes more logical to allocate overhead costs in proportion to the proceeds received. In this way, you will obtain more objective profit indicators from sales for each specific type of product. The yield of any object on direct costs is easy to calculate. However, then the question of how to determine, so to speak, the overall efficiency of the object. It automatically leads to another question: how to allocate overhead multipliers for objects properly. It seems that there is no correct answer to this question. Yes, there are techniques for spacing indirect costs, but you need to understand why you should do it before using them. Each management report should help make decisions. Implementing this will increase the company’s efficiency and ultimately improve its financial and economic state. If the spacing of indirect costs allows a decision to be made, the implementation will reduce the company’s expenses (without causing any harm) and increase its efficiency. Then, in the spacing of indirect costs, it makes sense.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.