The overhead cost of the business or department can be measured in terms of hours worked, systems used, employees operational, square foot and so on.
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The main support team for a large outsourcing company will be the IT team.There are 10,000 active desktops and 5,000 active laptops in the organization.The support for the desktops and laptops is provided by a single team.The support team has 10,000 desktops and 5,000 laptops.
10,000 desktops and 5,000 laptops are supported by the support team.15,000 will be considered as the total reach for the support team.Whatever overhead expense needs to be added to the individual project will have 15,000 as their base.
Support overhead is a part of the overall overhead for a project when a company calculates the cost of an individual project.The total cost of maintaining the support team is $500,000 if the project is using 1000 desktops.The support overhead will be allocated to project A.
Company XYZ has a building.There are ten projects in that building.The overhead cost of the pantry is something the company is trying to find.The total cost of pantry service is $500,000 a year.All the projects share the support service.All the projects are sharing the $20,000 administrative support service.
When the company tries to find the overhead cost of project A, the allocation base of pantry and administrative support will be $500,000 and $20,000.
The overhead cost for project A is calculated using the Allocation Base of Pantry and Administrative Support.
The factory works with machines and labor.The machine hours and labor hours will be the Allocation base.The life of a $100,000 machine is 500 hours.When the overhead costs of producing the finished product are calculated, the cost of the machine will have the base of 500 hours and the per hour cost will be $100,000.
If a finished good takes 10 hours of machine usage, then the overhead machine cost of goodwill is divided by the number of hours used.
The total labor cost can be used as the Allocation base for Labour overhead to produce a single well.As the cost of producing the good is determined using this base, it helps companies to fix a selling price.
Consider a warehouse that is used to make cars.100 cars are produced in a month.The warehouse is rented out for $10,000 a month.The allocation base of the warehouse is $10,000.Each car will share an overhead rent cost if 100 cars are produced in a month.
The most important technique to allocate the overhead expense is Allocation Base.The cost of service and product will be hard to calculate without this.Proper measures should be used to calculate the base.
There is a guide to what is Allocation Base.Along with an example, advantages and disadvantages, we discuss how to calculate allocation base.You can learn more about financing from the articles.
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