Overheads: concrete issues and intangible advantages


What accounts for all the interest in overheads?

Their weight in the accounting system, obviously. If indirect costs were a minimal portion compared to the total expenses, controllers should overlook them: accuracy pursued wouldn’t justify efforts in time spent, many involved employees and implemented information flows.

Yet, think about dealers operating in the learning field: the greatest indirect costs are salaries for sellers, because merchandise and other inputs are not very expensive.

Every seller needs to be trained, so shareholders have to invest money for renting conference rooms, purchasing office supplies, hiring experienced teachers, etc.

You are now allowed to know the total expense, but you don’t know if the effort for training will be successful. How much will training expenses affect the billing? Too little? Too much? Nothing?

On the other hand, a profitable quarter will make controllers wonder about the effective allocation of the same costs among business lines: they will choose either ABC (http://www.questidenari.com/?p=510) or traditional full costing method (http://www.questidenari.com/?p=500) using responsibility segments in order to input the overall expenditures.

The cost accounting procedures make use of strong discretionary power expressed by controllers, so final results will have been discussed by the time of the finished report.

Some managers prefer to fix the problem by eliminating training, Research & Development expenditures or promotion, and that’s why many businesses establish quality targets, and not only profitability goals.

Despite profits earned at the moment, the result of actual cost of training (or R&D) lower than the standard one doesn’t mean the achievement of long term savings necessarily. Managers must increase Economic Value Added in the long run, and a lasting competitive edge needs good services in order to satisfy customers: faithful clients might be the right way for sustainable profits.

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