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Reducing cost is one of the ways to increase your bottom-line. However, it is not easy to reduce cost. For this purpose, it is important to know about the different kinds of costs incurred by the business. The overhead cost that includes rent, repairs, office supplies, insurance, advertising, and interest is one such cost incurred by the business. These costs do not generate revenue directly but are necessary to carry out the business operations. If you want to maximize your revenue, you can do so by reducing your overhead cost. But how do you account for the overhead cost? The following are ways to account for overhead cost.
Know your overhead cost
Understand the difference between different costs incurred for your business. The overhead costs are costs that do not incur in the direct process of your products. They are indirectly incurred to run the business. Usually, the common costs involved in the making of the products include the cost of materials and labor. So be sure that you know your overhead cost before going further with the calculation.
List your overhead cost
Keep a record of all your overhead cost that you incur either for a monthly or yearly basis. Be consistent with the time period. If you are considering monthly records of your overhead costs, then the same should be with the direct costs. You can make use of computer program to keep a record of all the overhead costs incurred for the month.
Account for the common overhead cost
In every business operations, there are some commonly incurred costs. These costs are not in the company’s hand to reduce it. Therefore, if you are looking to reduce the overhead cost, make a note of these costs separately. Some of the common overhead costs include insurance, taxes, licensing fees and other legal expenses.
Calculate the overhead cost
Once you have figured out all your overhead cost, calculate the entire amount. Also, calculate the total amount of all the costs incurred by your organization. You can decide to calculate your overhead cost in percentage terms. Calculate the overhead cost percentage by dividing the overhead cost by the total cost and multiply by 100. This will give you the proportion of your overhead cost with respect to the total cost incurred by you. Similarly, you can calculate the percentage of overhead cost with respect to the sales revenue. Divide the overhead cost by the total revenue from sales to get the percentage figure. Compare your overhead cost percentages with similar businesses in the industry. If your cost is more compared to other businesses, you may consider reducing some of your overhead costs like the advertising expenditure or selling and distribution expense.
When you account for overhead cost, consider the size of your business as well. Large businesses may have a higher percentage of overhead expenses as compared to small businesses. Having the knowledge about your overhead cost is beneficial for small businesses to decide on the future course of action. For instance, if the overhead cost is less compared to others, then you may decide to spend more on expenses that are going to increase sales. Hence, it is important that all businesses are aware of their overhead costs so that you can cut the cost and keep your business afloat. If you need help in accounting cost for your business, then get in touch with an expert accounting firm.