How To Determine Your Overhead Multiplier

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Overhead Multiplier

Overhead costs are costs that cannot be attributed directly (without artificial distribution) to a specific object (product, division, sales channel, region, customer, etc.). Thus, there is no absolute overhead. The classification of multipliers for direct and overhead is always relative to the selected object. For example, if several products are produced in the shop,  costs for things such as lighting the workshop, repairing equipment, cleaning the room, etc. are invoices to an object such as “Products”. However, these same multipliers are direct to an object such as “Units” (these costs directly relate to the workshop without any diversity procedure). Therefore, there is not any one classification of the courses of multipliers for direct and invoices. Such classifications can be numerous because they are relative to the selected object.

The object can be a product, division, sales channel, client, branch, store, region in which the company operates, etc.

The overhead multiplier is the indirect multipliers of the enterprise that arise in addition to the main costs of the enterprise for the production and sale of products, works, and services. Overhead multiplier includes:

  • Rent for office, warehouse products
  • Costs incurred in connection with idle time and the appearance of defective products
  • Deductions for social insurance and various compulsory payments
  • Costs associated with the operation and maintenance of fixed assets
  • Costs for advertising and consulting services
  • Maintenance of the office and payment of utilities
  • Main production service
  • Costs for communication services (telephone, internet, etc.) 

Payment Costs

Payment costs are the costs that are not directly related to the production of a particular product or type of work and are attributable to the entire output. These include the costs of maintenance, operations, upkeep of building, structures, and equipment; deductions for social insurance and other mandatory payments; the content, salaries of administrative, and management personnel; costs associated with losses from downtime, etc. In the trade to the overhead multiplier, it is usual to refer costs associated with the storage, packaging, transportation, and marketing of products. In this process, bookkeeping is used extensively.

The logic of the classification of multipliers for direct and overhead (with respect to a particular object) seems to be understandable. The purpose of this classification is to calculate the economic efficiency of the analyzed objects. 
If you allocate direct costs, for example, you can calculate how much each company, unit (if sales are occupied by more than one department), sales channel, customer, branch or store (if it is a retail network) gives the company. 

Obviously, the profit 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. This automatically leads to another question – how to properly allocate overhead multipliers for objects. It seems that there is no right answer to this question. Yes, there are techniques for spacing indirect costs, but, before using them, you need to understand why it should be done at all. Each management report should help make decisions. The implementation of which will increase the efficiency of the company 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.

Like any other function, the spacing of indirect multipliers for any object in each particular company should have a very clear practical meaning. Before you deal with the choice of diversity techniques and the development of a specific scheme for each specific case, you need to decide what to do in general.

If a company manages to come up with the correct method for spacing indirect costs, a certain management report containing information on the financial and economic efficiency of the relevant accounting objects will be obtained.

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