For accounting professionals, administrative or non-manufacturing overhead describes a client’s general business expenses unrelated to production, marketing, or research costs. This includes expenses for things such as developing and carrying out general business policies, secretarial functions, accounting and legal services, and office-related business costs. By helping your clients understand why overhead cost allocation matters, you can better help them keep their financials organized for reporting and tax purposes.
Typical Administrative Overhead Costs
Though some clients may lump administrative and manufacturing overhead costs together as overhead, it’s best to separate the two expenses. Despite the similarities, these costs prove very different in terms of bookkeeping. Because administrative overhead costs usually prove consistent, your clients can allocate non-manufacturing overhead across their whole range of products, either by the number of produced units, hours worked, or wages paid. Typical administrative overhead costs include:
- Office and administrative space expenses
- Repairs, maintenance, depreciation, and office furniture and equipment costs
- Salaries and benefits for directors, accounting, legal, and non-manufacturing staff
- Office supplies
Typical Manufacturing Overhead Costs
Most small business owners find it easier to allocate manufacturing overhead across the products they produce. They usually do this due to the direct relationship between those expenses and operations. For instance, manufacturing overhead includes direct labour, raw materials, and factory equipment, all of which directly relate to the products they produce. Because of this, manufacturing overhead costs tend to fluctuate considerably.
Reasons for Allocating Overhead Costs
The main benefit to allocating overhead costs for accounting purposes comes down to pricing. While administrative overhead expenses tend to remain constant, manufacturing overhead costs can vary widely. Knowing your actual administrative overhead lets you spread it across everything the small business makes rather than assigning it to specific products. It can also help your clients accurately manage their profitability. By using direct cost allocation with administrative and manufacturing overhead priced in, they can see actual product costs and profitability levels. For these reasons, separating the types of overhead improves internal reporting, including budgeting and pricing.
Reporting Administrative Overhead
When you prepare the financial reports Canadian law requires for publicly traded companies or for stockholders, your clients must show administrative overhead separately from manufacturing overhead. When you create their income statements for these purposes, you must list administrative overhead as an expense under a selling, general, and administrative costs account, or as a separate entry. Under Generally Accepted Accounting Principles (GAAP), you report administrative overhead for the period in which your clients incur the costs.
While it might not seem intuitive for small business owners to separate overhead costs, as their go-to accounting professional, it’s up to you to explain why this benefits them in the long run. It also proves advantageous for you when it’s time for you to create financial reports and handle their tax returns. QuickBooks Online Accountant offers powerful tools for accounting professionals. Sign up for free.