My company is in the process of implementing basic cost accounting techniques for better control of its activities. However there are few takers in the top the method which I suggested to be employed for the overhead allocation.
Let me explain you in detail:-
We are consulting engineers providing Engineering consultancy SERVICES to various state owned corporations and we have number of projects in hand which will complete on various dates and keep on receiving new projects.
We are planning to maintain books of account for each project in order to know the profitability of each project. The question arises , What are our direct costs? What are our over heads? How we allocate overheads to these different projects with different time span for completion, profitability, billing cycle and labour input?
I, simply going my basic instinct as a qualified accountant ,first chose traditional costing technique, ‘absorption costing’ as the method to be employed on a standard costing platform. Then I have identified the over heads mostly fixed in nature and arrived at a standard absorption rate based on the direct man hours available in an accounting period –Formula applied is
Total amount of Estimated Overhead in an accounting period
Total Direct Man Hours available in the corresponding accounting period = $/ Direct Man hour
The Direct Man hours considered are only the engineers posted at the projects , the people who execute design and drawings, BUT NOT THE REGIIONAL OFFICE HEAD (under one regional office there are number of projects), who certainly a qualified engineer supervises all projects, CEO and MD of the organization who are also qualified engineers but are not dedicated to any project or a specified number of projects for the jobs intended to be carried out by the people specifically posted for a project.
For me going by the costing principle, Other than engineers who execute the job and posted for a specified job or engineers whose time sheet is maintained that can establish his performance in different projects , again my emphasis on engineers who perform the job at the grass root level not on a strategic or tactical level. For Eg. In a manufacturing scenario we consider the wages of Labour who make the product and works managers salary we absorb as a production over head, are only to be treated as direct costs of the project.
Here I have a situation that completely knocked out my knowledge and experience that says even CEO and MD costs are to be treated as direct costs.
Please enlighten me on two things:-
1. Is my selection to apply absorption costing for the company right?
2. Is it justified that the way I determined the overhead costs, direct expenses and the standard absorption rate?
Regards
CAclubindia
