Allocating Overhead in QuickBooks
A lot of QuickBooks users track overhead costs on a job in a separate spreadsheet outside of QuickBooks. What we're left with is two different sets of costs on one job; one without overhead, the other with overhead allocations. As you know by now, there are multiple ways to solve a problem. I want to discuss one of those ways.
Background:
Overhead costs usually include insurance, repairs and maintenance, licenses, tags, and registrations, shop supplies, etc., among many others. These costs are recorded by posting vendor invoices to each one of these accounts. You get an invoice from John Doe Ford for servicing your F-150 for $560 and you record it to repairs and maintenance. In the description you write Servicing 2017 Ford F-150 VIN#35468 but you don't assign it to a job(s). It shows up as one line in the accounts payable module (Exhibit #1). However, we know that the F-150 has driven to numerous job sites and is being accounted for in overhead. We don't want to break out this invoice and every other future invoice by job (Exhibit #2) because it's too much work and it will get messy. Imagine doing this for the majority of your invoices!
Exhibit #1
Exhibit #2
Overhead isn't really determined on an invoice by invoice level. You identify cost pools and calculate an overhead rate sufficient to cover your total overhead (which we can discuss further in a future lesson). When you calculate an overhead rate say $20, you have to identify a cost driver, a figure that helps you calculate how much overhead a job should be charged. That figure can be something such as man hours. You've spent a total of 1,000 man hours on a job #1, so job #1 should have $20,000 (1,000 x $20= $20,000) in overhead allocated to it. So how do we end up moving such costs to projects? A journal entry!
It starts with creating two general ledger accounts:
1) COGS: Allocated Overhead- An income statement/P&L account (Grouped under COGS)
2) Overhead Costs- Contra- An income statement/P&L account (Grouped under Operating Expenses or G&A)
Now assume we've calculated $90,000 in overhead costs to allocate to each of our jobs. In our journal entry, we'll breakout the costs by job (Exhibit #3).
Exhibit #3
In the end, we should get something like Exhibit #4.
Exhibit #4
ONE VERY IMPORTANT NOTE:
If you are allocating overhead to projects, make sure it's included in the total estimated costs! Otherwise we will inflate percent complete by adding costs that are not in the budget. Essentially, we'll break the WIP!
Thanks!
Ara
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