How to Allocate Overhead to Projects
Allocating overhead per dollar of direct cost can be a major problem since most overhead costs are not driven by dollar volume
Remove the Material Costs
Material costs have no bearing on overhead. If you insist on allocating your overhead per dollar of direct cost, at the very least remove the material cost and re-calculate the allocation ratio.
Commissions and Bonuses
We have now arrived at the issue that triggers the passionate discussions between Guy and me. How to determine exactly what commission rate to pay salesmen. I am not going into the details of how to do that as it has been written about before and is a very involved calculation with several possible angles depending on your exact situation.
Let's leave it as this: if you don't allocate your direct costs and overhead costs properly, your sales force will chase the wrong jobs. By allocating properly you strongly influence the work that your salesmen bring in.
With overhead allocation, the easy way hurts your bottom line and makes your day-to-day life more stressful than it needs to be. Take the time to figure out how to properly allocate your expenses.
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