predicting overhead for_a_product_business2
TRANSCRIPT
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
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