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Jason M. Tyra, CPA
Jason M. Tyra, CPA, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 178
Experience:  Principal at Jason M. Tyra, CPA, PLLC
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I work wholesale distribution company with 7 branches.

Customer Question

I work for a wholesale distribution company with 7 branches. for years overhead allocation has been based on sales volume. now one of the branch managers is suggesting overhead allocation based on branch assets. what is the best way to allocate overhead to the branches?
Submitted: 1 year ago.
Category: Finance
Expert:  Jason M. Tyra, CPA replied 1 year ago.

Hi There:

How to allocate overhead is a management decision. There isn't really a "best" way- you should choose the method that makes the most sense for your business.

Either of the methods you gave could produce a skewed view if taken out of context. Overhead based on sales volume might cover up the fact that a high selling branch consumes a disproportionate amount of overhead. Allocating based on assets alone doesn't account for the fact that a warehouse filled with obsolete inventory but selling nothing probably shouldn't have a lot of overhead.

In the absence of some kind of internal costing system, I would probably recommend allocation by sales volume as it is most likely to give comparable results that are easy for people who aren't management accountants to understand.

Customer: replied 1 year ago.
when you allocate based on assets do you use fixed assets or all assets or is this another management decision? are there pros and cons to each
Expert:  Jason M. Tyra, CPA replied 1 year ago.

Probably fixed assets would make more sense for you, because it doesn't really make sense to allocate overhead based on things like cash on hand or accounts receivable.

You should ask yourself what you're trying to measure and compare when making this decision. If, by "overhead," you just mean payroll, then it would make more sense for each branch to be allocated its actual payroll instead of a percentage of the total amount. You can easily set this up in almost any accounting system. If "overhead" also includes things like HR, IT, and corporate level management, then I would ask whether one branch is really consuming more of those services than other branches? And if so, then isn't this a problem that should be corrected, rather than just measured?

There are practitioners and consultants out there that specialize in managerial accounting. You might want to suggest that your company bring someone in to help you develop an internal costing system that helps you to reach your goals.