Overhead Allocation

Overhead allocation is the practice of distributing your indirect costs to revenue-producing projects.

Overhead is the sum of indirect labor and expenses. It can represent 25% to 50% of all expenses incurred by your enterprise. Overhead charges include the cost of accounting and administrative time, employee benefits, rent, utilities, insurance, and other expenses associated with the enterprise as a whole. To see a true picture of project cost, you must allocate overhead among your regular, revenue-producing projects, so that each project absorbs its share of the total overhead cost.

After indirect costs have been distributed, the revenue from your projects supports the total cost of doing business. Overhead allocation does not impact the general ledger, but is reflected on project reports run at cost.

Enter overhead allocation settings in Settings > Accounting > Overhead Allocation.

Allocation Methods

You have two options for determining how overhead should be allocated to each of your revenue-producing projects: proration or assignment.

You can choose to allocate overhead on an enterprise-wide basis or by organization (if you are using the Organization Reporting application).

If your enterprise uses billing rates for job cost rates or if you generate project cost reports that only list direct project charges (gross margin reporting), you can choose not to allocate overhead. This approach greatly limits your ability to measure actual project performance.

Allocating by Organization

If you are not using the Organization Reporting application, DPS automatically allocates overhead on an enterprise-wide basis. However, if you use Organization Reporting, instead of allocating overhead enterprise-wide, you can allocate overhead by organization. This means that you allocate overhead in two passes: first from corporate (non-operating) organizations to operating organizations, then from operating organizations to regular projects.

Accounts for Overhead Allocation

Normally, DPS allocates overhead based on a project’s year-to-date direct labor or revenue. However, you can enlarge the overhead base for your projects by including certain direct or reimbursable expenses in the base, along with direct labor or revenue. For example, you might want to include salaries for temporary employees or the cost of contract labor in the overhead base. To do this, specify the expense accounts whose charges should be included in the base.

Running Overhead Allocation

Because the Overhead Allocation process calculates overhead on a year-to-date basis, you can run it whenever you choose (multiple times during the same accounting period, if necessary). At a minimum, you should run it after you post all transactions for the period and before you print project reports. This will ensure that your project reports contain accurate numbers.

Provisional Overhead Rate

Until you run Overhead Allocation, DPS calculates current period overhead using a provisional rate:
  • If you are using the Assignment method, the provisional rate is your current assignment percentage.
  • If you are Prorating overhead, the provisional rate for a particular project is the rate that was in effect the last time that you allocated overhead.

Provisional overhead amounts appear on project reports and on screens for display only; they are not posted to the database.

Project Reports

Overhead amounts appear on all of the major project-related reports (Project Progress, Project Detail, Project Summary, and Office Earnings). You can also print an Overhead Allocation report that provides detailed information about current period, year-to-date, and job-to-date overhead allocation.

Related Topics:

  • Proration Method of Overhead Allocation
    The proration method bases overhead allocation on your enterprise’s actual total overhead. With this method, the sum of all amounts is charged to overhead projects. A project, phase, or task assumes its proportionate share of the overhead pool.
  • Assignment Method of Overhead Allocation
    The assignment method bases overhead allocation on a percentage that you specify. This overhead percentage is applied to each project, based on either direct labor or revenue, to determine the total amount of overhead allocated to each project.
  • Calculating the Actual Overhead Rate
    For a variety of reasons, such as establishing project fees, your enterprise may want to estimate its actual overhead rate.
  • Enterprise-wide Overhead Allocation
    If you are not using the Organization Reporting feature, DPS automatically allocates overhead on an enterprise-wide basis. Likewise, if you are using Organization Reporting, you have the option of allocating overhead on an enterprise-wide basis, essentially treating the entire enterprise as one organization.
  • Organization Overhead Allocation
    If you use the Organization Reporting feature, you can allocate overhead by organization instead of on an enterprise-wide basis.
  • History Loading for Overhead Allocation
    When you first implement DPS, you may want to enter historical overhead for prior years and/or months in the current year. Overhead is calculated on a year-to-date basis.
  • Overhead Allocation Report
    The Overhead Allocation report shows, project by project, how overhead was distributed as of the last time the Overhead Allocation process was run.
Parent Topic: Labor and Accounting