Overhead surcharge – what is it? There are many costs in a company. A distinction is made between direct costs and overhead costs . Overhead costs cannot be allocated directly to a cost unit or a cost center and must therefore be allocated to the product using cost center accounting . To convert the overhead costs to cost objects, which is overhead rate used. Cost units are the elements that can offset costs. Typically, these are the products or services that the company manufactures. They have to bear the costs that the production of the product range indirectly causes.
What are overheads?
In order to define the term overhead surcharge , it must first be clarified what overhead costs are. Costs are divided into direct costs and overhead costs. Overhead costs cannot be assigned directly to a product or a cost center; the assignment is only possible indirectly using a key. The overhead surcharge can thus be seen as an indirect indicator of a company’s competitiveness. Depending on the amount of the surcharge, the options for reducing or increasing the price as well as the profit share vary. As a result, the overhead surcharge can also be used as a means of measuring success in management. This is used in particular in retail, including franchising, which also uses the overhead surcharge to directly measure success. In addition, the overhead surcharge is based on the income statement and the accounting accounts. Therefore, this must also be checked regularly in connection with cost reasons.
How are overhead costs allocated to cost centers?
Rent or depreciation are examples of overhead costs. The overhead costs must be offset against the product via the cost center accounting or the operating accounting sheet; for this purpose, overhead surcharges must be determined. They are added to the product in the pricing procedure. The overhead costs are also known as indirect costs. Do you have different projects and departments in your company?
Characteristics of overhead costs
According to Sportingology, overhead costs can only be allocated indirectly to the individual cost units and are incurred for several units or orders. Overhead costs are distributed to cost units and offset against the cost units via the overhead surcharge. Overhead costs are incurred as
- Manufacturing overhead
- Material overhead
- Administrative overheads
- Distribution overheads
In the case of overheads, a distinction is made between cost unit overheads and cost center overheads. The overhead costs mostly relate to cost units. If the overhead costs are related to cost centers, we are talking about cost center overheads.
Definition of overhead surcharge – why overhead surcharge rate?
The overhead surcharge is the percentage surcharge on the individual costs and is intended to enable the overheads to be allocated to the cost units according to the causation principle. Products are usually considered to be the cost bearers. The overhead surcharges for each end cost center can be determined from the operating accounting sheet. The percentage surcharge can be calculated differently. So you can define different keys that make sense for different types of costs.
- Rent, lease and heating costs can be calculated using the number of square meters in the departments
- Water costs, for example, can be allocated to the number of employees
Allocation of the overhead costs to the cost units
The overhead costs can only be converted to the cost units via detours; the overhead surcharge is required for this. First, the overhead costs are distributed to the cost centers in cost center accounting, then they are offset against the cost units with the overhead surcharge. This ensures that the billing is based on the originator and that all cost bearers are charged proportionally.
Operating accounting sheet: Allocation of the overhead surcharge
So that the overhead costs can be allocated to the cost centers with the overhead surcharge, the overhead surcharge must be determined. The overhead surcharges are determined using the operating accounting sheet. Direct and overhead costs must be related to each other, according to the cost causation principle, the overhead costs are distributed.
The overhead rates are determined from the ratio of direct and overhead costs. In the case of overhead surcharges, a distinction is made between production surcharges, material surcharges, and administration and sales surcharges. The overhead costs are added to the production surcharge on the basis of the individual wage costs that arise for a cost unit. The material surcharge represents the relationship between direct material costs and material overheads; the administration and sales surcharge is based on the total production and manufacturing costs within a period.
Differences between the types of overhead calculation
Single-level surcharge calculation (cumulative, summary calculation)
– The overhead costs are offset in a summary manner by means of a surcharge that is offset against certain or all of the individual costs.
Multi-level surcharge calculation (differentiating calculation)
– The company is divided into cost centers, areas and cost centers. The overhead costs are then distributed to the proportional cost centers on the basis of value keys.
Determination according to reference
values With the third type of surcharge calculation, reference values are determined which most closely reflect the cost reason. Both quantity and value keys serve as the basis for distributing overhead costs to different areas.
Examples of the overhead surcharge
The overhead surcharge is to be illustrated using an example. For a mulled wine stand, a stand rent of 150 euros per day and a leasing rate of 100 euros for the set-up are due. For the sake of simplicity, additional costs are not included here. The cost types stand rental and leasing rates cannot be added directly to a mug of mulled wine, they are overhead costs. In total, there are overhead costs of 250 euros per day.
If a mug of mulled wine costs one euro for the stand operator in the purchasing department and 500 mugs of mulled wine are to be sold daily, the overhead costs must be added to the overhead surcharge. To calculate the overhead surcharge, 250 euros are divided by 500 cups, the result is 0.5, which corresponds to 50 percent. For a mug of mulled wine, the stand operator has to calculate a direct cost of one euro and a surcharge of 50 euros overhead, so the costs are 1.50 per mug of mulled wine.
Another example of overhead costs should be the production overheads: The monthly rent of 10,000 euros for a production hall in which flashlights are manufactured cannot be passed on to the individual flashlights, so it is necessary to determine the individual wage costs for a flashlight and then with to put the manufacturing overheads in relation. In this case, it is difficult to find out what the overhead cost is because different types of flashlights are made.