Overhead costs are Definition, concept, classification, types, expense item and accounting rules

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

An estimate is a calculation of the costs of production and sale of goods. It includes, in addition to direct costs for the purchase of materials, wages, as well as indirect (overhead) costs. These are expenses that are directed to the creation of working conditions. They cannot be attributed to the costs of the main production, as they are the key to the proper operation of the organization.

Terminology

All costs of the organization are divided into basic and overhead. The first category includes those related to the production process: wages of workers, the cost of raw materials, etc. Overhead costs are the costs of organizing business processes that support production activities: management, organization of production, business trips, employee training, etc. This category includes such non-production costs as compensation for damage from loss, damage to valuables.

Structure

Overheadis the cost of:

• repair work;
• receiving additional education, advanced training;
• payment of fees;
• transport services;
• losses caused by the release of defective products;
• payment for the services of advertising companies.

Economists classify overhead costs into four groups:

• general production;
• general business (maintenance of the labor force);
• production;
• other commercial.

In the legislative acts of the Russian Federation are not prescribed "overhead costs". This term is present only in medicine, construction, coal industry. Therefore, manufacturing enterprises have to independently distribute and calculate the amount of such costs. Usually, the distribution is carried out according to the share of each item in the total cost.

Let's look at the structure of each overhead cost item.

Administrative expenses

This type of overhead cost consists of:

• remuneration, taking into account social contributions of the administrative apparatus, line personnel (heads of sections, foremen, etc.), persons providing services to employees of the administrative apparatus;
• postal and telegraph expenses;
• use of computers, computing equipment, which is listed on the balance sheet of the organization;
• topographic works (in the construction industry);
• payment for legal, informational, consulting, auditing, notarial and other services;
• buying stationery;
• repair;
• payment of travel expenses to employees;
• operating a company car.
• depreciation deductions for funds used by the administrative apparatus;
• hospitality;
• payment for bank services.

This is an indicative list of costs. Each organization independently forms the structure of the management apparatus.

Service workers, construction sites

The first category includes costs for:

• training;
• contributions for social activities of construction workers;
• provision of living conditions: depreciation of residential premises;
• remuneration of cleaners, locksmiths, electricians and other service personnel;
• maintenance of free premises, their repair and maintenance, etc.;
• labor protection: repair and washing of overalls, individual devices;
• purchase of first aid kits, medicines, medical and preventive services;
• acquisition of manuals, safety posters;
• contributions to social events;
• to conduct medical examinations, certification of workplaces, purchase of regulatory documents on labor protection, etc.

This category also includes production overheads.

Expenses for the organization of construction sites include:

• wear and tear of production tools;
• wear temporarystructures: pantries, sheds, showers, floorings, stairs, structures, temporary wiring of electricity, water, gas networks;
• formation of reserves for all types of repair work;
• maintaining the fire department, conducting experimental work, rationalization proposals, geodetic work;
• production design, laboratory maintenance;
• beautification of construction sites.

Other expenses

This category includes:

• depreciation;
• loan payments;
• advertising costs;
• taxes and other obligatory payments;
• certification costs.

Calculation

To determine the amount of direct costs and overheads, you need to identify the criteria by which the division will be carried out. Basically, specialists distribute costs by functionality and production volume.

In construction:

• standards of construction work (when making estimates for investments, tenders);
• standards for installation work (when drawing up working projects);
• individual standards, etc.

In all other areas:

• Proportional to the wage bill of employees employed in the main production. Used in enterprises with manual labor.
• Proportional to product sales volume. Used in areas with automated production.
• According to the formula - the ratio of direct costs per unit of output to the total cost. It is used if direct costs inseveral times higher than indirect.
• Calculation of each expense item separately.

The volume of all indirect costs is calculated using the following formula:

NR=payroll + taxes + indirect overheads.

If an organization manufactures several types of products, it is better to combine different methods of dividing costs for each item. The developed method of distribution of overhead costs should be prescribed in the accounting policy of the organization.

Any of the accepted methods should be used according to the following principles:

• all costs are reflected in the BU accounts;
• costs are recognized in the period in which they are actually incurred;
• Cost costs to be accounted for in a separate account;
• overhead costs are taken into account when forming estimates for the period.

Percentage

The share by which the division of direct costs and overhead costs is carried out, each organization determines independently.

This is the formula according to which the distribution is based on the wage fund:

Indirect costs=Total overheads / payroll100%.

In construction, there are additionally mandatory standards. For example, the cost of installation work should not exceed 85% of the payroll. This restriction does not apply to objects financed from the state budget: construction of bridges, subways, tunnels, pipelines, soil stabilization. However, when calculating costs for large facilities, as well as at times whenindustry-wide costs are distributed within 60% of all costs, the indirect cost ratio should not exceed 80%.

In general, in construction, overhead costs are costs, the volume of which directly depends on the wage fund. They are calculated by the formula:

NR=Total Salary of Production WorkersOverhead Rate (%)Reduction Factor.

FOT includes not only salaries, but also the amount of deductions for social events. The cost rate and the reduction factor are regulated by legislative acts for each type of cost.

Let's look at some examples of calculating direct and overhead costs.

Example 1

The organization is engaged in the delivery of flowers and gifts. The payroll of employees is 29.5 million rubles. in year. In 2017, indirect costs were planned at the level of 89% and amounted to 26.3 million rubles. At the end of the year, the administration decided to reduce overhead costs by up to 63% by streamlining processes and reducing the staff of departments. In 2018, the level of fixed overheads should be: 29.50.63=18.585 thousand rubles.

Example 2

The total amount of indirect expenses of the shoe factory for the year amounted to 26.4 thousand rubles, and the wages of the main workers - 27.6 thousand rubles. The basis for the distribution of costs in the accounting policy of the organization is the payroll of employees of the main production. That is, 26.4 / 27.6 x 100=95. 65% of indirect costs are attributed to production costs.

Optimization

To reduce the volume of lines andoverhead costs, you need to plan them in advance. Drawing up a detailed budget, the subsequent analysis of deviations of actual costs from planned ones will help management analyze the cost structure and identify bottlenecks. Another way to optimize is to identify hidden reserves and automate routine processes. For example, instead of expanding the accounting staff, you can automate the input of the item and thus unload the accountant for goods and materials. You can also outsource the accounting process, that is, service by a third party.

Very often future cost savings involve capital investment. For example, in the long run it is more profitable to purchase premises and equipment than to spend money on rent. Also, optimization methods include a competent choice of suppliers of materials, bulk purchases that allow you to use discounts.

Sometimes department heads just don't see the options to cut costs. In such situations, it is worth considering the proposals of employees of a lower rank. For example, issue an order so that during the quarter each employee submits a proposal to reduce costs in his department. Such a strategy will reveal bottlenecks and hidden reserves in each unit.

Examples of normalization

Let's analyze the process of rationing the organization's expenses, the volume of which is 16,871 million rubles.

Administrative line items:

• Salary of administrative staff + insurance premiums- 10 million 258 thousand rubles.
• Communication services - 1 million 124 thousand rubles
• Consulting, legal services - 560 thousand rubles.
• Stationery - 512 thousand rubles.

Total: RUB 12 million 454 thousand

General business cost items:

• Employee training - 210 thousand rubles
• Labor protection - 78 thousand rubles.
• Hygiene products - 38 thousand rubles.

Total: 326 thousand rubles.

Organization of business processes:

• Protection - 1 million 943 thousand rubles.
• Fire safety - 755 thousand rubles.
• Auto repair - 515 thousand rubles.
• Fuel - 878 thousand rubles

Total: RUB 4 million 91 thousand

Total expenses: RUB 16 million 871 thousand

At the end of 2018, management will be able to compare actual costs with planned ones, analyze possible excesses and make a decision to minimize costs.

BU

As mentioned earlier, all costs included in the estimate should be reflected in the accounting. Accounting for overhead costs is carried out on account 26. Consider the main postings:

• DT26 KT70 - accrual of salaries to administrative staff.
• DT26 KT71 - issuance of accountable amounts.
• DT26 KT69.1 (69.3) - insurance premiums of the FSS (FOMS).
• DT26 KT60 (76) - service costs.
• DT26 KT10 - accounting for materials for household needs.
• DT26 KT21 - write-off of semi-finished products to production.
• DT26 KT02 - OS depreciation.
• DT08 KT26 - construction costs.
• DT20 KT26 - write-off of production costs.
• DT28 KT26 - accountingdefective products.
• DT76 KT26 - insurance.
• DT86 KT26 - targeted financing.

Medicine

The cost of medical services is an assessment of the materials used in the process, fixed assets, fuel, labor resources and other costs. According to the purpose, the costs are divided into economic elements. Thus, the cost of services in public institutions includes labor costs with all deductions, travel expenses, food expenses, purchase of medicines, depreciation deductions.

In addition, there is a division of costs into distribution costs, direct, general and overhead costs. These are costs that do not have a direct connection with individual types, are allocated to the cost. These include, in particular, the costs of OS maintenance, production, employee training, etc. Direct costs are directly related to the provision of services. These are the salaries of employees involved in the provision of the service, the cost of materials, the cost of food, etc. The institution also spends money on managing, organizing processes and bringing services to consumers. These amounts form general business and distribution costs.

The distribution of overhead costs can be carried out in proportion to direct costs, revenue, or another indicator. The last category in trading and manufacturing enterprises is profit. But state institutions are created not to generate income, but to implement social tasks. Therefore, you can evaluate the results of the work of state structures by:

• The volume of quality services. The more services were provided, the more needs were met, the more the medical institution received profits.
• Labour-intensive services. It is expressed in the duration of the process of its provision, the involvement of a large number of employees, the amount of materials. This also leads to a gap in the time of receipt of income. However, the complexity, although indirectly, affects the overall result.

Now let's look at examples of how overhead costs are divided into fixed and variable according to new indicators.

Volume of services

The medical facility provides several types of services. Based on the results of the monthly work, statistics are generated on the volume of work performed for each study (analysis, procedure, etc.) in each department. Although all types of services are equated to each other, their valuation differs significantly.

Example

Data on the volume of services provided by the medical institution for the month:

• Item A: 20 pcs - 11.1% (20 / 180 x 100).
• Product B: 50 pcs. - 27.8% (50 / 180 x 100).
• Item B: 110 pcs - 61.1% (110 / 180 x 100).
• Total: 180 pcs. goods.

According to the results of the month, the institution received an invoice for payment of electricity services in the amount of 15,000 rubles. Taking into account the received subsidies 7500 rubles. organizations will have to cover from their income. Overhead costs will be paid according to the following proportions:

• Service A: 7500 x 0.111=832.5 rubles
• Service B: 7500 x 0, 278=2085 RUB
• Service B: 7500 x 0.611=4582.5 rubles

Labor intensity

This indicator means the cost of working time for the production of a unit of production / the provision of one service. The value is measured in UET (conventional units of labor input). In dentistry, the procedure for calculating labor intensity is prescribed in the Instruction of the Ministry of He alth of Russia No. 408 of 2001. For other areas of medical services, the procedure for calculating labor intensity is not established by law. In practice, for this purpose, the method of timing and expert assessments is used.

The first method involves calculating the time by minutes for the provision of services. To conduct the experiment, a minimum of three specialists and one assistant are required. An observation card is created for each doctor. It records the time spent on providing the service, taking into account all the necessary elements: from examining the patient to taking an x-ray, from removing the filling to installing a prosthesis, etc. The experiment ends after 10 operations by each doctor: first aid, performing a certain operation, pin manufacturing, etc.

Labor intensity is calculated by the formula:

T1=T / 30 minutes where:

• T is the total time spent on all operations.
• T1 - the time required to perform one action.

YET=Т1 / 20 minutes.

Additionally, rest time is taken into account (within a 4-hour shift):

• 10 min. - for personal needs;
• 10 min. - on vacation;
• 10 min. - to the morning meeting;
• 10 min. - for sanitaryjob.

Accordingly, if in a shift (six and a half hours) the doctor needs to perform 5 procedures with a laboriousness of 5 UET, then the rest remains: 2 minutes x 4=8 minutes.

At least 10 specialists with a certificate for the provision of certain types of services, knowledge of a specific technology should take part in the method of expert assessments. Each of them must have at least 5 years of work experience in their speci alty, and at least 12 months in a particular industry. The essence of the experiment is as follows. Physicians are provided with a clear description of the case. They harmonize it with their personal experience of helping and make adjustments. Based on these data, an independent expert calculates the LLL using the formulas presented earlier.

Example

Variable overhead costs in a medical institution are transferred to the cost of services provided in proportions:

• Service A: 30 YET - 33.3% (30 / 90 x 100).
• Service B: 50 YET - 55.6% (50 / 90 x 100).
• Service B: 10 YET - 11.1% (10 / 90 x 100).

Total: 90 YET.

At the end of the month, the institution received an invoice for water supply services in the amount of 9 thousand rubles. This amount is transferred to the cost of services in the following proportions:

• Service A: 9,000 x 0.333=3 thousand rubles.
• Service B: 9,000 x 0.556=5 thousand rubles
• Service B: 9,000 x 0, 111=1 thousand rubles.

Fare

The structure of the cost of medical services is different. Some of them do not use consumables. At the same time, laboratory and radiological servicesare resource intensive. When choosing the basis for classifying costs, it is necessary to take into account the features of the provision of services. From the examples presented earlier, it can be seen that the same costs can be written off to cost in different amounts. If an institution uses all or part of the materials to provide services, then classification of costs by labor intensity is not appropriate. In such situations, it is better to use the method of distribution in proportion to direct costs, choosing as the latter the volume of materials used. Their quantity, price and types of services should be taken into account. An alternative way is to classify expenses by tariffs.

Example

The current price list of medical facilities:

• Service A: 250 rubles. - 19.7% (250 / 1270 x 100).
• Service B: 400 rubles. - 31.5% (400 / 1270 x 100).
• Service B: 620 rub. - 48.8% (620 / 1270 x 100).

Total: RUB 1270

The accountant needs to include the cost of staff training in the amount of 32 thousand rubles. to cost price:

• Service A: 19.7% - 6300.8 RUB
• Service B: 31.5% - RUB 10,080
• Service B: 48.8% - 15,619.2 RUB

Conclusion

Overhead costs are unavoidable costs to keep an organization running. Although they are not among the main ones in terms of the production process, these costs make up the bulk of all costs and affect the financial result. Timely optimization will help to avoid unnecessary expenses, make businessefficient.