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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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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.