Overhead allocation [in-depth guide]
Guide contents: Types of overhead | Overhead client | Overhead project | How is allocation of overhead calculated | Distribution of allocated overhead | Overhead expense & labor considerations | Overhead expense & labor considerations | Net profit calculation | Reports | Advanced reporting | Non-billable projects | Multiple GL companies
The simplest definition of overhead is the ongoing expense of operating your business. Workamajig allows you to track this overhead and distribute/allocate a percentage of the amount against a client or client project based on the number of hours worked for the client/project, the labor cost associated with the hours worked for the client/project or the amount billed to the client/project.
Expenses to your business are tracked using vendor invoices, expense reports converted to vendor invoices for payment, misc costs, journal entries, and labor costs. Where an overhead expense differs from a client expense is the overhead expense is not related to a client or client project or is entered against a client that has been designated as an overhead client. Workamajig will total these transactions which becomes the 'overhead allocation pool'. The amount contained in the 'overhead allocation pool' at any given time is based on the posting date or transaction date in the case of labor & misc costs. This pool can then be distributed to the client or project based on the dates selected when you look at the client or project P&L.
Types of overhead
COGS - Vendor invoice, misc cost, expense report converted to vendor invoice: Typically, COGS expenses are connected to the client and would not be considered. However, there are occasions, such as printing, color fiery, where you have purchased the items in bulk and use them internally.
Expense - Vendor invoice, expense report converted to vendor invoice, journal entry: these would be an expense, such as rent, utilities, payroll, that were purchased for use internally.
Other expense - Journal entry: these would be an expense that you have classified as other expense
Labor - time entries against projects with no client associated with it or the client has been designated as an 'overhead client': Labor is handled a bit differently. The actual cost of labor is entered via your payroll journal entry. However, we allow you to enter an hourly cost on each employee record. The hourly cost is a per hour value. It is up to you to decide what is included in this figure. Some agencies will only take the employee's base salary and divide it by the yearly number of hours, an unloaded value. Others will calculate the amount of overhead, divide this up by employee and add it to the base hourly cost, a loaded value. To ensure accuracy the way you arrive at an hourly cost for your employees should remain consistent across your entire staff. Workamajig will take into account this hourly cost when allocating overhead to the client/project.
From the company record, go to: Client setup > check 'overhead client'
The 'overhead client' designation is typically used for your company client record. Workamajig regards any expense entered against this client or client project to be overheard. NOTE: Any labor hours entered against an overhead client project are not considered as part of the 'total agency hours' or 'total agency hourly cost when calculating overhead allocation percentage.
Projects created for an overhead client that have billable items will be available for billing when using Mass Billing or Billing Worksheets.
An overhead project is typically set up to make it easier to report, track, and budget for your agency expenses. Typical projects include PTO/vacation, sales (travel & expenses) and internal marketing (corp website, media). The projects should be created using your agency as the client.
There are a few considerations when setting up these projects:
I do not want the project to show up for billing: create the project, as usual, this will assign a project number. You can then blank out the client ID/Name. Any project with no client designated will not be available to the billing process.
I do not want my staff's charge ability to go down due to work on internal projects: create the project, as usual, consider if you want it to show up for billing. From Project setup: Accounting, make sure 'non-billable' is unchecked.
I want the time entered on the project to be considered non-billable: create the project as usual. From Project setup: Accounting > check 'non-billable'.
How is allocation of overhead calculated
The overhead pool is calculated by the sum of all expense transactions (vendor invoices, expense reports converted to vendor invoices, and journal entries) that have posted to the GL account types: COGS, expense, and other expenses and are not associated with any client, client project or are associated with an overhead client/overhead client project.
NOTE - GL company considerations: If a specific GL company is NOT selected before running the client/project P&L reports, the overhead pool will consist of all overhead transactions from all GL companies. When you specify a GL company before running the reports, only overhead transactions for that specific GL company will be used to calculate the overhead pool amount.
This will divvy up the overhead "pool" among the lines being reported based on the total number of hours entered against the client project(s) / total agency hours. This percentage is then applied to the pool amount to arrive at an amount to allocate to the client or project.
NOTE: Client hours are based on 'approved' time entries and time not entered to opportunity projects.
Calculation: (Hours worked for client or project / total agency hours worked) = Pct of overhead to be allocated to client or project
This will divvy up the overhead "pool" among the lines being reported, based on the employee records hourly cost field for all time entered against the client project(s) / the total cost of all hours entered across the agency. This percentage is then applied to the pool amount to arrive at an amount to allocate to the client or project.
Calculation: (Total cost from hours worked for client or project / total cost from total agency hours worked) = Pct of overhead to be allocated to client or project
This will divvy up the overhead "pool" among the lines being reported, based on the total dollars billed on client invoices for the client or project(s) / total dollars billed towards all client projects. This percentage is then applied to the pool amount to arrive at an amount to allocate to the client or project.
Calculation: (Total amount invoiced to client or project / total amount invoiced across agency) = Pct of overhead to be allocated to client or project
No allocation of overhead will be applied, and all profitability is purely based on the costs and sales of the transaction directly linked to the client and/or project only.
Distribution of allocated overhead
When you run the Overhead allocations detail report, you will see that the overhead pool may be categorized into 3 groups: COGS, expense, and other expense. The system will distribute the overhead into these areas of the client/project P&L.
The initial calculation made above is to arrive at the percent of the overhead pool to allocate to the client. The value of this overhead is what the system is trying to match when it comes to distributing the overhead pool. In the case of expense, there is an additional calculation made to subtract out labor cost, which comes from the hourly cost setup on the employee record, and misc cost, which is a way of accounting for things purchased in bulk and then distributed to the client/client project, such as photocopies, stock photos, etc. Giving the following calculation:
(Allocation pool * pct to allocate) = allocated amount of COGS overhead
(Allocation pool * pct to allocate) - labor cost - misc cost = allocated amount of expense overhead
Other expense calculation
(Allocation pool * pct to allocate) = allocated amount of other expense overhead
Overhead expense & labor considerations
The above expense calculation often raises the question: What should I use for the hourly cost on the employee record? Should I use just the base salary per hour or a loaded hourly cost?
Either is fine, as the system will take this into account when arriving at the allocated amount of expense overhead. Here are a couple of examples to show you: We will assume that the person only worked 1 hr for the client.
Base or unloaded: I set the hourly cost to be the base salary divided by yearly hours.
Let's say this is $10. My expense overhead pool comes up to $200. Revenue = 1000. Pct to allocate = 10%
So if my overhead pool is 200 and the client has 10%, this means the client should have a cost of $20. This becomes the 'target allocation' the system is trying to reach. So it will make a further calculation to ensure the allocation will act as if it was adding $20 in expenses.
Expense allocated amount - labor cost - misc cost = amount to allocate >> 20 - 10 - 0 = 10
So in the client P&L >> revenue - expenses - overhead = profit >> $1000 - $10 reported labor cost - $10 expense overhead allocation = $980
Loaded: I set the hourly cost to be base salary plus the calculation of hourly overhead
Let's say this is $40. The overhead pool is $200. Revenue = 1000. Pct to allocate = 10%
Allocated amount - labor cost - misc cost = amount to allocate >> 20 - 40 - 0 = -20
So in the client P&L >> revenue - expenses - overhead = profit >> 1000 - 40 labor cost - (-20) overhead allocation = $980
As you can see, in either case, the profit is the same. and it appears that your loaded hourly cost is a bit overstated as the system needed to put in a negative allocation to bring it back to the "true" $20 of overhead. This is why you can use a base or loaded hourly cost on the employee record, as in either case, the system will take it into account. You just need to be consistent across all employees so the calculations will remain true.
Net profit calculation
With how much the overhead allocation plays a role in the net project calculation. Here is how to see a breakdown of its values in the P & L multi reports.
The following fields and calculations will get you the same end result of the net profit value.
[agency gross income] - [other expense allocated] - [total inside costs] + [other income]
([revenue] - ([allocated COGS] + [direct COGS])) - ([other expense allocated]) - ([outside other expenses] + [inside labor cost] + [inside misc cost] + [overhead allocation]) + ([other income])
All reports are located under Menu > Everyone > Report center > Financial reports.
Overhead allocations detail
This report is designed to show you all the transactions that make up the overhead "pool" based on the date range supplied. This is a very useful report and should be run at least once a month to see if there are any transactions in here that should have been billed to a client.
Client P & L (detail) (multi)
This shows you the client-level numbers of profitability based on data entered against the client or client projects listed
Project P & L (detail) (multi)
This shows you the project-level numbers of profitability based on data entered against the projects listed.
While there are the above reports, you can give your account managers access to the Project dashboard, which will calculate the profitability using the same methods.
To get a 1=1 match of the total from the Allocated overhead detail report and the Client P&L (multi) or Project P&L (multi) for the same date range, you must add the following fields and alternatively make a calculated column for a total of all three fields. NOTE: The Project P&L only shows project-related transactions. The transaction associated with a client but not a project will not be shown.
Overhead allocation detail report = Field names in P&L (multi) reports.
- Total for cost of goods sold = [allocated COGS]
- Total for expense = [overhead allocation] + [inside misc cost] + [inside labor cost]
- Total for other expense = [other expense allocated]
- Grand total = [allocated COGS] + [overhead allocation] + [inside misc cost] + [inside labor cost] + [other expense allocated]
NOTE: When allocating by hours, you must have actual hours entered on the project(s) within the desired date range to see an allocation amount appear.
If a transaction is linked to a non-billable project, but the client of the project is a billable client, then the transaction on the project is flagged as non-billable. However, the costs go against that project and client and do NOT go into the overhead "pool".
Multiple GL companies
If you are one company and do not have GL companies enabled, then ignore this section. However, if you have 'multiple GL companies' enabled, then you MUST select a GL company for every transaction you enter. So while the GL company of the transaction can be determined by the project, in the case of overhead, you are generally not choosing a project, which means you must enter the GL company in the header of the transaction being entered. In many areas of Workamajig reporting, you can filter by 'no GL company' to catch any transaction that may have slipped through your process that needs to be corrected.