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Allocating overhead cost for insourced/outsourced business.

We're going through a bit of an expansion. As we do so we're expanding both our internal staff, contract staff (within and without the facility), and true outsourced to domestic and international companies. My question is, in doing so I want to best capture the best costing for these activities, without getting excessively complex in my approach. My initial take is to allocate management by revenue, and other internal costs just across internal staff. I'm open to more reasoned approaches....

Answers

John Clinton
Title: Senior Manager - Finance
Company: Wipro Consulting
LinkedIn Profile
(Senior Manager - Finance, Wipro Consulting) |

Think hard about what value is truly gained from ANY allocations. Unless you have a burning need to move true OH costs to inventory...why clutter both your ledger and your Close process with allocations? In my experience, most of the gains can be realized by an offline analytical effort, consuming far less resources and clearing up a heavy burden on your ongoing routines.

Thomas Wendling
Title: VP Finance
Company: iQor, Inc
(VP Finance, iQor, Inc) |

My company has went to a fully loaded cost model in 2014. We are in the service business, so the attempt was to try to drill down to a program level and if that program was making any margin. We allocate as much as possible through direct costs, but the cost centers such as H/R, I/T, etc we look at headcount. Some eye opening results, but we are constantly tweaking the results as they are never perfect.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Keith, I would look at the real drivers of the costs. Ex. HR cost of say $10k to be split between 2 divisions with Revenues of $100k and $40k. but the division with the $40k revenue has a much higher employee turnover incurring substantially more HR cost than the $100k division. You will get some pushback from the Division chiefs sometime down the road especially for low margin divisions and the Division chiefs gets some pressure on the margin contributions.

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