predicting overhead for_a_product_business2

PREDICTING OVERHEAD FOR A PRODUCT

BUSINESS

I want you to think of a person standing outside

in the rain with an umbrella over their

head every time I say the work overhead. The word taken in its most

literal form means something that stands

over the head of something to make sure

all parts are covered

Product cost

Period cost

Are cost associated with the production of your

product or service

Gets its name from the way it is recognized in

your accounting records

Every business has 2 categories

of cost

This article focuses on overhead associated with making your product (product cost) as opposed to period

cost. Product cost overhead consists of:

• Indirect material • Indirect labor• Indirect- other

Overhead associated with making your product can be broken down into indirect labor, indirect material and general overhead used in production

Indirect material and indirect labor

Indirect- other

Included in overhead, are labor cost and materials needed to finish your products but not directly used in the production of the product

An example for my bakery, is someone is needed to move inventory from the storage space to the kitchen. While this is necessary, it is not a part of directly making the product.

This is the catch all for all expenses not directly related to production

An example will be rent expense for the kitchen

Predicting overhead

An equation for overheadOverhead cost =Activity level * buffer percentage * cost per unit

List all business activities

Carefully detail what is needed to bring these activities to past

Figure out the cost of one unit of the activity

Determine a buffer

Predict total cost based on activity level

Steps to predict overhead

Purchasing materials & supplies

Moving inventory

Preparing the ingredients for baking

Baking the cake

Cleaning up after baking the cake

First, list all business activities. In my bakery, activities include:

Indirect material

Indirect labor

Indirect- other

Second, carefully detail what is

needed to bring these activities to

past

Below is the breakdown of activities in “My Cake Shop”

Variable cost: with variable cost, the price you pay for each unit does not change (or changes insignificantly during our budget year).

Fixed cost: fixed cost is cost that stays the same from month to month. An example will be rent.

Third, figure out the cost of one unit of

activity

Variable cost for "My Cake Shop" below:

Fixed Cost for "My Cake Shop" below:

Lastly predict the cost for

these activities

Lastly, use the equation below to predict the

cost for these activitiesOverhead cost =Activity level * buffer percentage * cost per unit

Activities are good predictors of overhead. By knowing what is required of your business, you increase your chances of succeeding. Using activities to predict overhead is more efficient than historical data as it forces you to stop and ask “what is needed?”

Asking what is needed is crucial especially if you exist in an industry where the speed of discovery is quite fast.

Conclusion

More informationwww.mybusinesskpi.com/PredictingOverhead.html

Email: evelyn@mybusinessskpicoach.com

Phone: (417) 812-5945 www.mybusinesskpi.com