MANAGEMENT ACCOUNTING IN ORGANISATIONS

Management Accounting in Organisations

Management Accounting in Organisations

Importance of Overhead Accounting for Businesses

All businesses have overhead. Overhead got its name to represent assets that necessary to help the business run, but don't directly contribute to the bottom line. For example, that building that you work in is considered overhead because you need the building to run your business, but the building does not contribute directly to earning profits. The building contains the call center and houses the employees who receive the orders that do directly contribute to the bottom line.

A building is obviously overhead, but what about more subtle things, such as when the employees spend their time on non-value added activities. They may spend a good deal of time doing administration that may or may not need to be done. These are the kinds of things that creep in to a business or company the larger it gets.

The problem with overhead, is that it is easy to have too much of it. It is easy for a company or small business to get carried away with non value added programs, managers and assets that contribute nothing directly to the bottom line. Before you know it, your company is dragging around a very heavy ball and chain.

What are some strategies to determine the percentage and necessity of overhead, and to control it so that it does not grow faster than it should?

You need to effectively identify which elements in your organization are overhead. As mentioned, this is not always easy to do, but there are a number of accounting methods which can help you determine what percentage of your business is overhead. Simply put, in accounting, every asset, employee, or activity that produces a product, and produces revenue for the company is not considered overhead, and conversely, everything else that does not directly produce revenue is considered to be overhead.

To give a simple example, if the accountant your small business, as it does its accounting of all expenses and labels the ones that contribute directly to the increased revenue of the business, and labels those that do not contribute directly, then you can calculate the percentage of overhead by dividing the non-revenue producing expenses by the total expenses. By knowing, and keeping track of your overhead from year to year, you will more effectively be able to know if the ball and chain is growing or shrinking.

As mentioned earlier, overhead has a tendency to grow as a business grows. One way to know if these expenses are essential to the business growth is to have a portfolio review process annually (of course, this activity is also overhead). Reviewing regularly whether or not a business process, business asset, job function, database system and product line are producing the desired results. Let's say, for example, that you have a group of project managers. Your portfolio review could determine if this overhead activity has been effective. If it has been effective, then they would probably rule that this is a ...