Tag Archives | administrative expenses

Predetermined Overhead Rate

Predetermined Overhead Rate Definition

A company uses a predetermined overhead rate to allocate overhead costs to the costs of products. Indirect costs are estimated, a cost driver is selected, cost driver activity is estimated, and then indirect costs are applied to production output based on a formula using these data.

Predetermined Overhead Rate Example

For example, imagine a company that makes widgets. In order to make the widgets, the production process requires raw material inputs and direct labor. These two factors comprise part of the cost of producing each widget; however, ignoring overhead costs, such as rent, utilities, and administrative expenses that indirectly contribute to the production process, would result in underestimating the cost of each widget. Therefore overhead costs are allocated to production output via predetermined overhead rates, or rates that determine how much of the overhead costs are applied to each unit of production output.

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Predetermined Overhead Rate Usage

Traditional costing systems apply indirect costs to products based on a predetermined overhead rate. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs. There are several steps for computing the predetermined overhead rate in the traditional costing process, including the following:

1. Identify indirect costs.
2. Estimate indirect costs for the appropriate period (month, quarter, year).
3. Choose a cost-driver with a causal link to the cost (labor hours, machine hours).
4. Estimate an amount for the cost-driver for the appropriate period (labor hours per quarter, etc.).
5. Compute the predetermined overhead rate (see below).
6. Apply overhead to products using the predetermined overhead rate.

Calculating Predetermined Overhead Rate

First, use the following formula to calculate overhead rate.

Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Cost-Driver Amount

See the following calculation example:

$30/labor hr = $360,000 indirect costs / 12,000 hours of direct labor

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Current Expenditures

Current Expenditures Definition

Current expenditures refer to short-term spending that is fully expensed in the fiscal period in which it is incurred. They are in contrast to capital expenditures, which refer to spending on long-term assets that are capitalized and amortized over their useful life. Examples of this type of expenditure include wages, salaries, raw material costs, and administrative expenses.

Accounting Treatment

In accounting, treat current expenditures like other short-term expenses. Fully expense them during the fiscal period they incur. Unlike capital expenditures, which are first recorded on the balance sheet as assets before hitting the income statement as amortization expenses, record current expenditures directly on the income statement as expenses in the current fiscal period. Basically, if the capital outlay is invested in an asset that will last longer than one year, then consider it a capital expenditure and treat it accordingly. On the other hand, if the capital outlay is invested in an asset that will last less than one year, then consider it a current expenditure.


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current expenditures

 

current expenditures

See Also:
Double Entry Bookkeeping
Indirect Labor
Indirect Materials
Lease Agreements
Net Operating Loss Carryback and Carryforward

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Complex COA for SG&A Expenses

See also:
Problems in Chart of Account Design
Standard Chart of Accounts
Example Chart of Accounts for Selling, General, and Administrative Expenses
Generally Accepted Accounting Principles
Financial Accounting Standards Board

Complex COA / Chart of Accounts for SG&A Expenses

In lieu of a simple chart of accounts for SG&A expenses (selling general and administration expenses), you can design a numbering system with more information and structure.

Once the major class codes have been assigned (i.e. 6NNNNN..NN = Manufacturing Overhead) the nominal accounts such as labor, fringe benefits, consulting fees, supplies, telephone, etc. that have been identified as required accounts during the NAP, should be grouped into natural groupings (1–9) that can be rolled up to facilitate management planning and decision making.

Example of Chart of Accounts for SG&A Expenses

For example in the retail industry, the relationship of total wages and employee benefits (expenses impacted by adding employees) to sales by retail unit, or region, or total facility costs (rent, utilities, property taxes) to sales, provide management important barometers of store managers’ operating efficiencies and expense controls. Grouping the nominal expense accounts (which may total 50 -100 accounts) into the appropriate series, rather than numbering them alphabetically, for example, facilitates the comparison/analysis process.

6NNNNN, 7NNNNN, and 8NNNNN – Operating Overhead, Research, Selling, and General & Administrative Expenses – These divisions facilitate analysis, as in the homebuilding industry, where management may want to compare Construction Overhead and/or Marketing Expenses per unit by subdivision, product line, or geographical area.

9NNNNN..NN – Non-Operating Income and Expenses such as interest income, other miscellaneous income, and interest expense.


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Salary Expense

Therefore, the 100 series may capture salary expense data as follows:

  • Executive salaries
  • Exempt Salaries
  • Non-Exempt Salaries
  • Overtime Compensation
  • Incentive Compensation
  • Vacation & Holiday
  • Sick Leave
  • Others appropriate to the company

Fringe Benefits

The 200 series may include fringe benefits data as follows:

Thus, the 100s and 200s represent the employee expenses that are directly impacted by changes in headcounts. As a result, they can be rolled up into reports by department, state, division, or other management designated requirement.

The remaining groups may be compiled as follows:

Travel & Entertainment

300s = Travel & Entertainment, such as:

  • Airfare
  • Seminar Fees
  • Meals, excluding entertainment
  • Entertainment
  • Auto Rentals
  • Mileage

Office Expense

400s = Office & Other Miscellaneous Expenses, such as:

  • Office Supplies
  • Insurance
  • Miscellaneous Taxes & Licenses
  • Donations

Outside Services

500s = Outside Services, such as:

Rentals and Leases

600s = Rentals & Leases, such as:

  • Office Rent
  • Equipment Rent

Utilities

700s = Utilities, such as:

  • Electricity
  • Natural Gas
  • Propane

Depreciation and Amortization

800s = Depreciation & Amortization

Non Operating Income and Expense

900s = Non- Operating Income & Expense, such as:

So for example, a homebuilder may have the following accounts:

6 120 24 11- Construction Overhead; Non-Exempt Salaries; Subdivision 24; State 11

7 120 24 11- Marketing; Non-Exempt Salaries; Subdivision 24; State 11


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chart of accounts for sg&a expenses

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Administration Expenses

Administration Expenses Definition

In accounting, administration expenses are listed on the income statement as operating expenses. Administrative expenses are often included in an expense category called selling, general and administrative expenses, or SG&A. Administrative expenses include items such as administrative personnel wages, rent expenses, and utilities. The most effective ways to manage administrative expenses down are by either cutting overhead costs or laying off administrative personnel.


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Periodic inventory System

 

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administration expenses

See Also:
Example Chart of Accounts for Selling General and Administrative Expenses
Complex Chart of Accounts for Selling General and Administrative Expenses
How to Estimate Expenses for and Annual Budget
How to compensate sales person
Average Cost
Administrative Costs

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How to Control Annual Audit Fees

Partnership, loan or other agreements may require the annual audit of a company’s financial statements.

How to Control Annual Audit Fees

The cost of this audit can constitute a significant administrative expense. Therefore, your company’s financial staff needs to properly manage the audit fees. Although the independent accountant has the responsibility of establishing the scope of the audit required in order for him to issue an opinion on the financial statements, the company can limit the involvement of the independent accountant’s staff, in order to keep the audit fee at appropriate levels.

Adopt the following procedures to minimize annual fees. Also, assure appropriate cooperation between the company’s financial staff and the independent accountant…

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