By way of example, most of us get charged a separate rate for Subs on our GL. I take the total estimated Sub expense and divide it by estimated PR and increase my 'applied' GL rate for every payroll dollar accordingly.
You have to allocate this cost to jobs in some reasonable method, and increasing the PR allocation rate is far and away the easiest method. Although, this said, if your Sub volume changes dramatically up or down in any given year, you will need to evaluate and adjust periodically, probably quarterly.
As far as philosophy goes, it depends on whether you do mostly hard bid or mostly negotiated work. A lot of companies calculate two different 'burden rates'. One rate for hard bid work and a separate one for negotiated or cost reimbursable jobs. The hard bid rate should include all of the direct costs, whereas the negotiated rates need to include everything you can justify on a cost reimbursable contract. Include all fringes, and even an allocation for vacation time for direct field workers for whom, on most contracts, all fringes are chargeable as direct cost to the job.
Don't include the vacation time on any project manager that has to be allocated to the job, unless his time is considered reimbursable according to your contract. A burden rate is like manufacturing overhead rate. It is calculated to apply burden to inventory WIP. We compute burden rate by dividing indirect costs by labor-related direct costs of our projects. Theorectically your 'overhead rate' is a calculation to collect all costs not directly incurred while performing your trade.
Melissa Rutledge. If you need income tax advice please contact an accountant in your area. Businesses should calculate a burden rate when they want to get a clearer picture of what it will cost them to actually manufacture their products. The results of a burden rate analysis are sometimes why companies prefer to open manufacturing plants outside their home country, because the burden rate for labor or machinery operation proves to be too high to allow their business to be profitable in the area in which they reside.
This is part of the reason why you will sometimes hear of specific industries getting tax breaks, to keep some larger companies going. Some companies fail because they have not conducted a proper burden rate analysis in advance of commencing business operations.
These are expenses a company incurs above and beyond the payout of regular salaries to its staff. They include:. Burden costs are added up and then converted into a burden rate. This rate will be higher for senior employees and executives because they will have increased benefits and higher salaries. Inventory burden is calculated separately and converted into an hourly cost rate based on machine hours.
This figure needs to be added to the total cost of producing your product. They include rent, insurance, depreciation on assets such as equipment and vehicles, office expenses and administrative salaries. You might allocate some fixed expenses to specific departments: for example, factory utilities and rent, production supervisors' salaries and inventory insurance.
Variable, or semi-variable, overhead expenses are more difficult to predict because they fluctuate according to sales, seasonal changes, promotional outcomes and changes in the cost of goods and services. They include phone expenses, office supplies and mailing and promotional expenses. Grace Ferguson has been writing professionally since With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance.
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