Posts

overhead expenses - Complete Controller

Overhead costs are the expenses, which are difficult to recognize with specific activities or products. Unlike materials and production labor, the overhead cost is the unseen part of the refined product.  In this regard, the overhead cost is considered a necessary input to production, similar to the raw materials. Understanding the nature of overhead cost assist the business managers to use strategies and control the expenses. The documentation and proper allocation of the overhead cost among products or the departments help managers understand the production cost of an organization. The manager also needs to consider bookkeeping to accurately verifying the overhead expenses. Appropriate allocation of the overhead cost is also likely to contribute to ascertaining the extent to which each of the products of the firm has helped with prosperity. Check out America's Best Bookkeepers

The small business owners used the overhead cost control for monitoring, distributing, and reducing their overheads. Overhead cost includes the administrative, as well as rental expenses, the office supplies, subcontractors, depreciation, as well as advertising. The costs considered as overhead are expenses in the business processes; however, it does not necessarily mean that these expenses are essential. Controlling for the overhead cost is a complex process. The overhead cost distribution is vigorous for the organization to possess more than one activity or possess more than one department. The allocation of overhead costs is also essential if the organization has been considering adding, drop, or change the levels of business actions.

Steps to Control Overhead Expenses

Organizations use different techniques for decreasing overhead costs. The steps include. Check out America's Best Bookkeepers

  1. Reduction of Working Capital

Working capital refers to funds associated with production and inventory from beginning to sales.  The appropriate management of inventories, raw materials, and the accounts receivable results in the decrement in the working capital required by the firm, resulting in the decrement in the overhead cost. In most cases, the overhead is fixed; therefore, the increment in sales also results in a reduction in per-unit overhead cost.

  1. The Implementation of Total Quality Management

Ambiguities resulting in rework and the incorrectly filled orders arise in the increment in the cost, causing a reduction in the saleable units—payoffs resulting from the implementation of a total quality system results in the sales volume. For staying in the business world, the firm needs to adopt customer-oriented strategies. However, the organization must also control the cost associated with the promotional activities and the cost associated with the effective utilization of the funds. The implementation of total quality management is likely to contribute to controlling the overhead expenses. 

  1. Strategies to Control Sales Costs

Organizational management can implement a range of strategies to control the sales cost and increase sales volume. For staying in the business world, the organization must be customer-oriented; however, at the same time, the organization must also control the created due to sales and promotional activities. The utilization of funds in an effective manner is one of the most commonly used business strategies which are used to control the sales cost. Managers can also decrease the value by relating the service incentive to profitability compared to the product’s sales price. Check out America's Best Bookkeepers

  1. Consideration of Maintenance Costs

In light of the accounting expert’s experiences, it is essential to develop effective and long-term advertising and promotion of a product or services. The repairs and maintenance increase the lifespan of the equipment. The general objective behind the support is to keep equipment in running condition for fulfilling the production goals. Remedial maintenance is making minor changes in the design or materials of equipment. On the other hand, predictive maintenance involves sensing, measuring, or controlling devices to identify and correct technical ambiguities before break-down.

  1. Reduction of Transportation Expenses

The sales efforts are sometimes unpredictable and fail to accomplish significant results.  A careful analysis of sales expenditures permits reduction and reallocate of sales expenditures, increasing advertising efficiency simultaneously. The transportation expenses can be controlled up to a certain extent and are likely to decrease overhead costs. Establishing a fixed schedule for transportation can also contribute to controlling the overhead cost.

Check out America's Best Bookkeepers 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-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure 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. Check out America's Best Bookkeepers

Business team meeting present the project .professional investor working with new project. Concept business and finance

BQE Core’s Usage of Overhead Multiplier

Company’s may calculate and change their overhead multiplier quarterly or yearly and they may also handle billing and time entry differently. Generally, the calculation of Bill Rate is done using the following formula.

Bill Rate = (Profit + Overhead Multiplier) x Direct Personnel Expense

While Overhead Multiplier is calculated using:

Overhead Multiplier = (Expenses in Total + Allowance for Doubtful Accounts) / (Direct Labor + Direct Expenses)

Certain government departments limit profit by not allowing the creation of any allowance for doubtful accounts. In light of your contracts and/or practice, Direct Labor costs are either incurred through salaries or direct personnel expense.

These calculations can also be done through the General Ledger, special accounts for Direct and Indirect Labor, and other data from bookkeeping. This uses a simple formula:

Overhead Multiplier = Sum of Indirect Expenses/Sum of Direct Labor

Things BQE Core and QuickBooks Users Should Know

If you are using QuickBooks as your business’s accounting software, while integrating with BQE Core, you need to ensure that you send the cost (in terms of time) to the correct accounts. Your activity codes should be mapped in order that direct and indirect time is easily distinguishable. Also, ensure that you separate Direct Expenses from Overheads. Again, Proper Mapping is highly recommended.

Activity Codes for overhead activities can be very different from the ones for direct project expenses. Furthermore, different Activity Codes are also needed for Indirect and Direct time.

In some cases, your firm may have employees who don’t enter their work times in BQE Core. These people have categories of activity, which are known as outside project. These categories are later summed up and included in the Indirect Labor account in the General Ledger. If you want to see information for each individual category, you can check it in the project reports you get.

The activity codes you set are key as the mapping that connects QuickBooks and BQE Core is highly dependent upon them. After the codes have been set up properly, the staff simply needs to enter their details in the activity that relates the most to their tasks. There is no need for them to have in-depth knowledge regarding mapping or accounting. Firms with smaller projects usually find the tasks related to activity codes pretty tedious.

Sometimes, companies need to distinguish between billable/non-billable and chargeable/non-chargeable expense and time. For example, an expense might be non-billable, however it can be still charged as an expense to a project since it would be in the cost of doing that project. The client might not be billed for it, but the identification of expense is necessary.

In BQE Core, you can select an option to assign a project to a particular ‘Overhead’ Contract Type. This option is utilized for some internal work, for example: office renovation or marketing.  The expense is treated like a regular project. Similarly, several small projects can use the same activity codes. You can exclude and delete the codes that aren’t relevant.

This is all done simply to allow you to breakdown the project into smaller, more manageable tasks, making it easier to put together and track your budget. It can be made even easier if everyone in your firm who collects a salary can enter time in BQE Core. This will give you a more accurate look at the hours and the corresponding costs that are required in running your project. It might be unusual for non-project employees to enter their hours in BQE Core, as it is project-centric software. You can also ask them to mark their off days on the next workday in order to process their payroll and track Paid Time Off. After all of that is done, to calculate Overhead Multiplier, simply do the following:

  1. Run Profit/Loss Report for the previous year (12 months) – Take the values of Total Expenses and Total Payroll Expenses
  2. Apply The Formula

Overhead Multiplier = Total Expenses / Payroll Expenses

This will give you a value which will denote the total expenses incurred per every dollar you pay in wages. BQE Core then calculates the default Cost Rate by multiplying Pay Rate for each employee by the Overhead Multiplier. The Cost Rate is used to derive the Cost Amount by being applied to the work hours. When you update the Overhead Multiplier (either quarterly or yearly), new time entries are subject to a recalculated cost rate.

Check out America's Best Bookkeepers
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

 

Photo of various stacks and rows of coins isolated on white with INVESTMENT concept related words imprinted on metal surface
Reducing overhead expenses can be tricky as modern business has many new aspects to handle. However, for it to make a difference, saving costs matter greatly. To be able to contribute beneficially to all commercial endeavors, arresting any unwanted or unnecessary costs is the key to good management skills. In the global markets today, being cost-effective is definitely a magnificent step.

 8 Strategies for Reducing Overhead Expenses

  1. IT Resources And Its Costs

IT resources can eat up energy, so being energy efficient and reliable are two things that are mandatory for modern IT shared resources like printing and email. Switching to equipment that helps things run with low costs is highly advised. Large screens consume more electricity and so does an older version of motherboards and drives. The latest technology allows more cost and energy savings. For example, converting your business needs to cloud computing is a little costly but, once implemented, it saves many resources and is always feasible in the long run.

  1. Reducing Overhead Expenses with the Internet

Using internet telephony is a marvelous way to save on business communication costs in the shape of reduced phone bills and other expenditures incurred for different services that are offered on a mandatory basis by the phone company. And, living in the 21st century, it’s wise to utilize all that is available.

  1. Monitor Payment Services

Some banks deduct charges from the merchant account. If that increases and the turnover isn’t worthy of it, stop using it. If sales are poor and the only sales that do occur are online payments, that means partial profits. For reducing overhead expenses, insist on cash wherever applicable.

  1. Daily Vital Activities

The digital era has turned offices paperless. Vital daily correspondences, for example, between vendors and field agents like engineers, for specific material requests can be conducted and stored as PDF on digital storage media much easier as compared to printing paper for a file. Having a centralized database of correspondences would be a good idea if the situation is as described. However, other expenditures such as electricity and heating expense must be supervised. Employees who wish to work from home are welcomed to do so, reducing overhead expenses, cutting utility charges, and other related expenditures. Even on premises, make sure an advisory system of politely requesting all equipment to be placed in standby mode to become more cost-efficient. Avoiding high frequency lighting and providing energy efficient light such as low energy bulbs offer a significant sigh of relief when billed.

  1. Outsourcing

Some businesses require minimized accounting or IT services which can easily be received by consultants or service providers. By outsourcing such departments, businesses can benefit with employing interns or freelancers. Temporary staff is effective for specific projects. Businesses like vending or merchandising eradicate the need for mass training of staff and help in reducing overhead expenses. 

  1. Outdoor Calls

Traveling for campaigns requires cost-effective methods such as using teleconferences instead of taking a team of marketing whizzes on a three-day product introduction workshop. Using business tools for communication like Skype should be the first mode of all such conferences. With technology and the evolution of the web, it’s a smart business tool that is always an influential ally of a business. Traveling lightly or traveling only on essential trips that are necessary help to economize by reducing overhead expenses. 

  1. Business Gatherings

It is always a great idea to know business contacts but it’s even smarter to form joint venture partnerships. Some businesspersons welcome such projects and, with the experience it provides, the portfolio of a business shines bright! Sharing projects leads to consortium which helps provide an influx of revenue while sharing tasks between entities. This approach is rampant in construction, oil and gas, power generation, etc. This practice leads to win-win situations which are of mutual interests. Carrying assigned tasks per project description helps in reducing overhead expenses on both sides, while delivering quality and ensuring a greater profit.

  1. Smart Decisions – Buy Versus Rent

Some business owners have to deal with this often. Renting versus buying; which is better. It’s always a great idea to procure small equipment like pumps, which are easily handled by trained staff. It’s a little more difficult with high power industrial pumps which can be rented in dire circumstances. But, it’s always preferred that the continuously needed hardware should be purchased.

Check out America's Best Bookkeepers
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

Businesswoman making to do list on diary
In traditional business accounting, the term overhead expenses refers to costs that are not directly associated with the production of specific product units, specific service engagements, or specific sales. “Overhead”, instead, denotes the supplementary costs of production, service delivery, or sales activities. The overhead costs have to be paid regularly, irrespective of whether the company is engaged in a high or low volume of production. It is vital, not just for the sake of budgeting and bookkeeping, but for setting an optimum price for the products and services to make a profit.

Firms plan, quantify, and examine overhead expenses. As a result, overheads, like other expenses, eventually influence how an income statement proceeds. With the increase in expenses, the profits decrease. Your income statement is affected, as a whole, because of these expenses and you have to make required adjustments to cater to them.

Overhead Expenses in Business Accounting

Overheads are either fixed, which means that they stay the same month after month, or they can be variable, which means that they can vary depending on the business activity for the specific month. Some overheads fall into the semi-variable category, which means that they are incurred regardless of business activity, and some are related to the circumstances. Utility bills can be categorized as semi-variable because some of the base charges are fixed while the remainder depends on your usage.

Overheads can be general as well as departmental. A general overhead would be distributed among the whole company while departmental overheads are charged strictly to the specific department. Typically, a service-based business will have more general expenses in the form of insurance and utilities.

Categorizing Overhead Expenses

Overheads can also be applied to many operational categories such as administrative and marketing. Administrative overhead costs are related to the administration of the business and include costs associated with hiring and keeping a receptionist or bookkeepers. Branding for your company also involves certain costs that fall into overheads. Your business accounting needs require you to identify these materials, commercial, printing, and other expenses and charge them into overheads.

Reporting for Overheads

Because the overhead expenses directly affect the profitability of the company, they appear in the income statement of the company. You must account for overheads in order to determine the net profitability of your company. These expenses will be deducted from the revenue and the remaining income, after taxes, will determine your profits.

Applied overhead is generally recorded under the cost accounting method and is charged to a specific department or production job. They are quite dissimilar to general overheads and usually cater for depreciation and insurance expenses.

For business accounting purposes, applied overhead expenses are charged according to a specified formula over multiple departments. For example, if the expense is incurred by marketing, it may not be fully allocated to it. Instead, it will be distributed among various departments according to a specific percentage.

Overhead Rate

To allocate overheads, an overhead rate is applied which determines the resources used in the production of each product and then distributes the expenses accordingly. One way to accomplish that is by setting a fixed rate based on the machine hours required for the production of a product. This is a simplified approach, however, real-time business accounting scenarios require you to account for several cost drivers and then set an overhead rate.

It can be difficult to accurately estimate the overhead expenses. Therefore, the costs are generally estimated depending on the overhead rate for each cost driver.

Under Applied Overheads

Sometimes the assigned cost of work in progress goods does not equal the assigned amount and therefore has to be reported as a prepaid expense on the balance sheet.  Debiting cost of goods sold at the end of a year offsets the discrepancy. Under applied overhead costs are also referred to as unfavorable variance.

Adjusting your books for overhead expenses is an important task that must be undertaken by every business if they want to correctly estimate their profits and set an optimum price for their products.

Check out America's Best Bookkeepers
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

 

 

 

 

How you set a price determines your profit margin. However, selecting an appropriate price is a challenging task. When you are not aware of how much you are spending, price-setting becomes even more challenging.

Knowing how much it costs your business to make a unit of a commodity helps you price them appropriately so that you can not only cover your costs but also make a potential profit. Thus, determining the value to set a fair price is as necessary as doing bookkeeping to preparing financial statements. However, raw materials cost is not the only element to consider when calculating the total manufacturing cost per unit. Direct labor and manufacturing overheads are also equally important. Check out America's Best Bookkeepers

Total Manufacturing Cost

To determine per unit cost of a product, you first have to calculate the total manufacturing cost of all the items manufactured during the given period. Then, divide the estimated value by the number of items. The end figure you obtain is one unit’s manufacturing cost. Understanding and calculating the total manufacturing cost is necessary as you can compare it to the total revenue generated, and you use it to determine your company’s profitability. This is especially crucial for small businesses lacking the privilege of a financial safety net. The most basic formula for determining total manufacturing costs is to add up all costs of direct materials, direct labor, and manufacturing overhead consumed during a given period, as follows:

  1. Calculating the total cost of all materials directly utilized for manufacturing purposes

Direct materials are, typically, all the raw materials and elements that go into the finished product. If your company manufactures wooden furniture, expenses would include the wood in the furniture and the glues, nuts, bolts, and screws needed to hold the entire piece of furniture together. It would also have varnish or paint that goes into making the finished product. Consequently, the total of all these expenses is simply the total cost of direct materials consumed.

  1. Calculating the total cost of labor contributed to the manufacturing process

This has to include not merely the basic salaries and wages of all the workers primarily employed in the manufacturing department, but also any incentives and benefits they receive.

  1. Calculating the total cost of manufacturing overhead Check out America's Best Bookkeepers

Indeed, this is, by far, not only the final but also the most time-consuming step of determining the full value of manufacturing. To account for all sources and components of manufacturing overhead, you must consider every aspect of the following expenses incurred:

Indirect Labor: This part includes the wages, salaries, benefits, and incentives of any employees who were not directly involved in the manufacturing process, but their labor was nevertheless crucial to the manufacturing process. They can, for instance, include supervisors, in-house quality inspectors, and janitors.

Indirect Materials: Any of the materials consumed to maintain and repair the manufacturing equipment, tools, or building fall into this category. For instance, fuel utilized during the manufacturing process is part of the indirect material.

Utilities: Any utilities that mainly keep the entire manufacturing facility operational are simply part of the manufacturing overhead costs. Such costs typically include water, sewage, electricity, telephone, and internet services. Check out America's Best Bookkeepers

Repair and Maintenance: Any of the money spent on the repair and maintenance of the machinery and the building itself falls under the total manufacturing overheads.

Taxes and Insurance: Any of the tax and insurance expenses you bear on the machinery and property used for the manufacturing process becomes part of manufacturing overheads.

Depreciation: The loss of value of assets due to their obsolesce or usage is depreciation. This also has to be considered for manufacturing overheads.

Stolen Assets: The money lost through any stolen assets almost have to be accounted for manufacturing overhead.

Adding up all of these costs account for total manufacturing overhead.

Calculating Manufacturing Cost per Unit

To determine the total manufacturing cost per unit, you need to divide your total manifesting costs by the total number of units produced during a given period. For instance, if your business made 2 million units in 2017 and incurred total production costs of $10 million in the said year, then the total manufacturing cost per unit of the year is $5.

Check out America's Best Bookkeepers 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-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure 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. Check out America's Best Bookkeepers