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What is the best way to allocate overhead expenses to jobs? I guess this is a 2-part question. The general accounting question: How can I come up with a somewhat accurate amount/percentage to allocate to each job? Part 2: What is the easiest way to do this in QuickBooks-a journal entry?
Any thoughts are appreciated! TIA.
11-14-2003, 03:23 PM
Can you give us your country location, please. There are different national accounting regulations, conventions and terminology to be considered. Also, some idea of the sort of business you're in - car repair? software development? nuclear waste disposal? - it will help us to formulate a sensible answer.
Certainly. The company I am assisting is located in the US and is an explosives/blasting company. Currently we are working on changing their setup to get better job cost info out of QB. Part of that is allocating overhead expense. (I'm still working on the best way to allocate direct job expense. If have the time or inclination - please see my other post "job costing-please help!") Please let me know if you need more detail...Thanks again
11-18-2003, 11:14 AM
I have the same question. Our situation is I would like to allocate tool charges to all jobs based on hours worked. This would then allow me to charge tool costs to our projects and also allow me to track the expenses/credits to my overhead tool account.
My thought and I welcome comments would be to allocate a "other tax" in the employee setup. This would then be a company paid contribution in the form of a % of wages. All credits and debits with be to overhead accounts. I thought this would be more automatic than a G/L entry.
11-19-2003, 08:45 AM
Quickbooks doesn't easily facilitate the allocation of "Overhead" costs to individual jobs.
Not surprising really, given that conventional accounting wisdom defines the overhead, as that part of the company operating expense which exists largely independently of turnover. Normal everyday fluctuations in turnover (i.e. how many jobs did we invoice this month?) are not usually reflected in similar fluctuations in overhead (e.g what the rent is, or the cost of running the boss's car). I know it's not written in stone, and all businesses are different, but that's the general rule.
i.e. - Costs which vary up and down directly in line with turnover TEND to be operating costs and can be deducted from the sales income before the trading or gross profit is caculated.
Costs which do not vary as turnover varies, TEND to be classed as Overheads, which are deducted from the trading profit, to get the nett profit.
Some costs (Advertising? Vehicle Fuel?) are a bit of a mixture, and each business must make its own decisions about whether they go above the line or below. A lot depends on how difficult they are to analyse in this way. How would you allocate your advertising spend across the jobs that you won on the back of a campaign? By wasting lots of valuable time on it, I guess.
To get back to the question, Quickbooks offers very little standard functionality to allocate overheads to specific jobs. In practice, the easiest way to do this would be by looking at the sales income from that job as a percentage of the total income, and allocating the same percentage of the fixed or static overhead. Unless you have a more complicated model in mind.....?
And the most obvious way to do this is by exporting the job profitability report to Excel and manipulating it there.
Hope this helps.
11-19-2003, 12:11 PM
Thank you, Paul, you saved me a lot of typing!
I asked what sort of business you're in, AnnB, so I could suggest where to draw the Direct/Indirect Cost line. The first rule is to ask what you are going to do with the information when you've done all the work.
So, would it be of any benefit to you to try to apportion, say, your telephone bill to individual jobs? Probably not, there's very little you can do about it. But maybe at least some of your staff's travelling costs are easily attributable to individual jobs, and seeing that cost explicitly shown could well be of use. Drive the decisions by asking (a) What use can I make of this information if I have it? and (b) is it going to benefit me enough to be worth the time expense? Costs over which you have little or no control, are relatively low, not significantly associated with one type of job more than another, or very difficult to atrribute to individual jobs, should be left as general overheads.
So let's suppose you have decided to attribute an expense amount to a job. If it's a particular supplier's bill you can use the Customer/Job field in the detail area and then pick up this line under Time/Costs when you create the customer's invoice, or simply report on billable costs. If you want to just take an amount from an expense heading, you need a journal. Credit the expense account and debit a Cost of Sales account ('General Direct Costs' or something), with the customer#job name on the debit line. This takes the amount 'above the line' - out of Expenses and into COGS.
Thank you both for your responses! That helps me a great deal. My tentative plan is to have 2 groupings of COGS accounts: Direct and Indirect job costs. Direct will include items such as time and material. Indirect will include Drill, Truck costs, etc. We will keep general overhead expense (office salaries, rent, etc.) separate. (I think you guys saved us many headaches where this is concerned.)
Because they keep detailed records of material and drill usage, we are trying to job cost those items back into QB using a "0" balance bank account, referred to as a "Suspense" account in other postings. The benefit I see of this over a journal entry is that I can cost non-inventory items to a job in this manner. (Unfortunately, when they receive a shipment of material and the bill, it is not easy at that time to determine which job and how much of that material will be used on which job. They also don't always base the invoice on the material used.) My thought was that time will automatically be job costed using timesheets in payroll and that material will be entered into the suspense account based on the actual reports from the field. For the Indirect costs i.e. Drill Usage, we are trying to determine a fair hourly rate based on previous data. I can also enter that using the suspense account or a journal entry.
I guess my thoughts are that the more we keep in QuickBooks, the better. I love the ability to send info to Excel, but once it is sent and manipulated, if changes to the QB data take place, it is difficult to track the updates in the Excel file.
If anyone foresees problems with this setup, I would truly appreciate your input.
11-20-2003, 04:49 PM
You are best placed to determine what is right for your business, I am always reluctant to lay the law down about accounts and a business I have never seen, but one warning: don't let cost calculations become the tale that wags the dog of doing business efficently. The key activity with costs is to control them generally - make them enough to meet the required standard, but don't pay more than you need - not to spend hours measuring them. If you are comfortable that your Drill Usage costs are consistent with maintaining the required standard and as efficient as you can make them, *that* is what is important - if it is difficult to attribute them to individual jobs my recommendation would simply be not to bother to attempt it. You could end up spending $100-worth of your time debating where to allocate $20 of cost!
Thanks so much for the input. You have given us a new perspective and may have saved us a lot of effort!
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