Accounting



Accounting

In Fabricator Inc. the overhead is allocated to jobs based on direct labor hours. The overhead cost at the Fabricator Inc. is now 3,000 dollars per direct labor hour which seems illogical to the engineer. In the free market economy the management of firm's expenses is the beginning point for their success. So it is extremely significant for construction firms not only control their expenses but also forecast them. The issues of construction business's aggressiveness come up continually throughout the arrangement of engineering bids and taking an interest in public tenders. A wrong assessment of overhead expenses might realize either too high or too flat overhead costs, which, in turn, might undermine the intensity of building foremen, or might even power some engineering associations bankrupt. A legitimate assessment of overhead expenses is an issue significant to building builders; accordingly, this paper studies the issues of intensity of an engineering firm's overhead costs.

Answer 1

Engineer's Concern about the Overhead Rate going up

The overhead rate is a major concern especially in the construction business. It is the cost of non projected expenses that is the indirect cost which also includes indirect labor which is expressed as a percentage of total direct labor. It is the most significant and critical among other performance indicators. It is not known or not calculated properly then it is impossible to determine the engineering business's profitability accurately. The lower the overhead cost, the more the profit margin of the firm. A benchmark of total direct labor of around 150 to 175 % is acceptable. If the indirect expenses are managed they reduce the overhead rate. If an overhead rate of a firm increases 175 % then it should be a major concern for a business and it calls for some immediate action. The direct labor cost of a business depends on two things one is the number of working hours and second the average hour rate for labor when directly involved in manufacturing of the products (www.accountingtools.com). The overhead costs are as mentioned the indirect costs which includes indirect labor, administration and quality control. The selling price must be equal to at least the total direct and overhead costs to break even. The overhead rate is the ratio of the overhead cost to an allocation base, which is direct labor, equipment hours and factory space. The overhead rate based on labor hours or costs assumes that overhead costs are proportional to labor hours.

They are two different types of overhead costs. One is the administrative and other is the manufacturing overhead. The administrative one includes costs that are not included in the development or production of products and services or it can be said as all the overhead that does not come under the manufacturing overhead for instance, cost of office administration and sales etc. manufacturing overhead is the cost that a business incurs which is other than the direct cost. The business or its managers need to allocate manufacturing overhead costs to the inventory items that are ...