Allocating Overheard Part 1

For contractors, understanding all the costs that involved with a job is important. There are the obvious ones such as labor and materials.  However, you not only need to cover direct job costs but also the overhead for the business, and still net a profit (or why else be in business?!)  A few areas to consider could include:

  1. Office staff/expenses,
  2. Equipment/vehicle costs (direct and indirect like wear & tear)
  3. Indirect costs like fuel
  4. Shop staff, repairs & maintenance

There are a variety of ways you can allocate overhead. Today we’ll look at the simplest and fastest method – allocating by division. I’ve broken this up into 2 parts:

  1. Allocating ALL your overhead expenses
  2. Allocating your Indirect Costs

Allocating all overhead expenses: Assuming your QuickBooks Classes are your company’s divisions, you can allocate overhead by division (or Class) Below is a P & L by Class – I collapsed the accounts so you just see the totals and I turned on % of row so you can see the percentage for each division in terms of sales, direct costs and gross profit.  You can either use total sales or gross profit percentages as the way to spread across.  For example, if you use percent of sales, then you would multiply the overhead by 66.8% for New Construction in the example below.

    1. Create an expense account called allocated overhead
    2. Create a journal entry crediting overhead by the total expense shown in the overhead account and debiting your divisions by the appropriate percentage

Here’s the resulting P & L

  1. Another option is to allocate just indirect costs (e.g. fuel, equipment costs, supervision, etc.)
    1. Create a Cost of Goods Account called Allocated Indirect Job Costs
      1. You’ll have to add up your indirect costs. If you’re already one who has that sectioned off, then it’s easy to grab the numbers. Otherwise decide which accounts to total.
      2. I added some indirect costs to the example below (note -this would not be a complete list).

Here’s the journal entry

And the resulting Profit & Loss

So, if you’re looking to tip your toe in the water on allocating, this is definitely the easiest.  And if you do nothing else, it definitely makes you take a closer look at your numbers and what each division needs to do to be profitable AFTER not only your job costs but your overhead as well.   However, as you’ll see in part 2, there are ways to allocate overhead recovery by job, which would be more helpful for estimating successfully. So, stay tuned!

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