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What are some of the best practices for managing and reducing overhead costs?

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Overhead costs are the indirect expenses that are necessary to run a business, such as rent, utilities, insurance, and administrative salaries. They can have a significant impact on the profitability and competitiveness of a company, especially in a dynamic and uncertain market. Therefore, it is essential for cost accountants to manage and reduce overhead costs effectively and efficiently. In this article, we will discuss some of the best practices for doing so, based on the following principles:

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1 Allocate overhead costs accurately

One of the key tasks of cost accounting is to allocate overhead costs to the products or services that consume them, using appropriate cost drivers and allocation bases. This helps to measure the true cost and profitability of each product or service, and to identify the sources of inefficiency and waste. It also enables better pricing, budgeting, and decision making. To allocate overhead costs accurately, you should use a consistent and logical method, such as activity-based costing (ABC), which assigns costs based on the activities and resources that each product or service requires.

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Ernest Teal
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Use a budget is most important Allocate depreciation based on each asset class by appropriate measures Allocate indirect labor by average costs

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2 Track and analyze overhead costs regularly

Another important practice is to track and analyze overhead costs regularly, using relevant and reliable data and tools. This helps to monitor the performance and trends of overhead costs, and to identify any deviations or anomalies that may indicate problems or opportunities. It also helps to evaluate the effectiveness and efficiency of the allocation method and the cost drivers, and to make adjustments if needed. To track and analyze overhead costs regularly, you should use a dashboard or a report that shows the key metrics and indicators, such as the overhead rate, the overhead variance, and the overhead absorption.

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3 Eliminate or minimize unnecessary overhead costs

A third practice is to eliminate or minimize unnecessary overhead costs, by applying the principles of lean management and continuous improvement. This means to eliminate any activities or resources that do not add value to the customers or the business, such as excess inventory, idle capacity, duplication, errors, or delays. It also means to minimize the costs of the necessary activities or resources, by optimizing the processes, systems, and standards, and by seeking for ways to reduce waste, increase efficiency, and enhance quality. To eliminate or minimize unnecessary overhead costs, you should use tools such as value stream mapping, kaizen, or 5S.

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4 Optimize the use of resources and technology

A fourth practice is to optimize the use of resources and technology, by leveraging the opportunities and advantages that they offer. This means to use the resources and technology that are most suitable and effective for the business needs and goals, such as outsourcing, automation, cloud computing, or artificial intelligence. It also means to use them in a smart and sustainable way, by avoiding overuse, misuse, or obsolescence, and by ensuring security, reliability, and compatibility. To optimize the use of resources and technology, you should use tools such as cost-benefit analysis, benchmarking, or life cycle costing.

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5 Align overhead costs with strategic objectives

A fifth practice is to align overhead costs with strategic objectives, by ensuring that they support and contribute to the vision, mission, and values of the business. This means to align the overhead costs with the customer expectations and preferences, the market conditions and opportunities, and the competitive advantages and differentiators. It also means to align the overhead costs with the organizational culture and values, such as innovation, quality, or social responsibility. To align overhead costs with strategic objectives, you should use tools such as balanced scorecard, strategic cost management, or target costing.

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Robert Jaeger

Quality. Controlling. Servant Leader.
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It is also imperative as you set up a balanced scorecard, that you are collecting information that can be benchmarked either to other plants within your organization or against other top performers within the market you are performing. It is also important that you are able to effectively measure them, and that the inputs are controllable.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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venkataramanan Thiru

consultant & financial advisor at Self-employed
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OVERHEAD COSTS ARE THE SUM OF INDIRECT MATERIALS, INDIRECT LABOUR & OTHER INDIRECT EXPENSES ANY CONTROLLING INVOLVES, ANALYSIS FIRST THEN ELIMINATING WASTEFUL ITEMS & INCREASE PRODUCTIVITY . MANY USE STANDARDS, BUDGETS, AND VARIANCE ANALYSIS. OTHER AREAS MAY INCLUDE VALUE ANALYSIS, SUBSTITUTION, SIMPLIFICATION, VAREITY REDUCTION ETC.

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What are some of the best practices for managing and reducing overhead costs?

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1 Allocate overhead costs accurately

2 Track and analyze overhead costs regularly

3 Eliminate or minimize unnecessary overhead costs

4 Optimize the use of resources and technology

5 Align overhead costs with strategic objectives

6 Here’s what else to consider

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