Overhead absorption
The true cost of a project includes both the direct costs and the overheads of running a business. Direct costs are usually simply to identify and allocate to the project, such as material, labour and sub contractors. However, overhead costs are more difficult to identify and allocate to projects. To find the true cost of a project, it is essential that you include an element of overhead cost into your project costs.
There is no standard way of calculating and allocating your overheads to your project costs. How you do this will depend on how accurately you want to measure your costs, as well as the type, size and activities of your business.
In a service business, you could incorporate the overhead costs into the labour rate for your services. For example, a fixed overhead rate could be applied to the hourly rate of mechanics in a garage. The overhead rate would be set as the total cost of overheads divided by the total number of hours worked by the garage's mechanics in a given year.
Deciding whether to use overhead absorption
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Use overhead absorption if you want to automatically calculate and allocate overheads when posting cost transactions.
Overhead absorption rates for project item types can be set by percentage or a fixed value, and you can specify an overhead uplift percentage or amount for each project item type. When a project item is posted, the program will calculate the overhead value and post this additional cost to the project. Project specific overhead calculation rules can also be set.
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Do not use overhead absorption if you want to see overheads reported separately to the direct costs, and not to affect Gross Profit.
You can then create project items types that are designated as an Overhead Project Item type. This is set on the Default tab for each Project Item type (Utilities > System Setup > Project Structure Settings > ProjectItem Type). The costs posted to these items are reported separately in the profitability reports, affecting Net profit but not Gross profit.
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The profit report including the uplift costs:
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The profit report:
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Note: If you do not account for overheads or are not sure how to, speak to your Accountant for advice on how to apply overhead absorption in your business. Accounting for overheads is not mandatory.
Reporting and analysis
Once you have decided on your overhead uplift rates, it is important that they are reviewed regularly. Any increase or decrease in trading costs will have a substantial effect on the profitability of a project, and whether all of your overhead costs are recovered or not.
Reports and enquiries include the calculated overhead uplift value so that they show realistic cost and profit figures. Project Accounting allows you to choose whether you want to include the overhead uplift value in cost and profitability calculations.
By default, Project Accounting includes the overhead uplift figures in all cost and profitability calculations. If you do not want to include these figures, you can disable overhead absorption in the project settings.
To use and set up Overhead Absorption
Open: Project Accounting > Utilities > System Setup > Project Accounting Settings.
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Choose to Record and track Overhead Absorption on the Features tab
Once selected, the default Overhead Uplift rate settings for your project item types are enabled.
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Select Settings to choose how uplift rates are calculated by default for the required Project Item Types in the Project Accounting Settings.
Once entered, you can choose to which project item types you want to use overhead absorption. The default uplift rates set here are added to your project items and used when creating new project items.
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Choose to Display Overhead Uplift Rates for the required Project Item Types in the Project Structure Settings.
Select this if you want to display the uplift rate on the Costs and Charges tab for each project item so that the default value can be amended.
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If required, enter a different default uplift rate for individual project items on the Costs and Charges tab for each project item.
Once set here, this uplift rate is used each time the project item is added to a project.
- If required, enter a different uplift rate for the project item on an individual project on the Project > Amend Project | Costs and Charges tab.