Overheads: the costs that belong to everything

Overheads are the shared costs that do not belong to any one part of your business. Insurance. The office. The loan. The accountant's fee.

Some costs are easy. Seed went on the corn. Framing lumber went on the Miller job. You code the line to the part that used it, and you are done.

These are the hard ones. Nobody can say which part used the insurance, because all of them did.

You tell the software how to split them — 70% corn, 30% beans, or however your operation really works. Get that wrong and every per-acre and per-job figure you produce is wrong with it.

The two bad answers

Leave them at the company level. Now each enterprise looks better than it is. The difference sits in a pile at the bottom that nobody attributes. The corn looks like it made $140,000, and you have $40,000 of overhead that belongs somewhere.

Split them evenly. Now the enterprise with three acres carries the same insurance as the one with three hundred.

What Moab Ledger does instead

You set up an overhead once, with a name, a number and a category. Then you describe two things about it: how it behaves, and where it goes.

How a cost becomes an overhead

Code the line to the overhead and leave the enterprise blank. That is the whole switch.

A line with an enterprise on it is a direct cost to that enterprise, and it is never allocated. A line with no enterprise and an overhead code goes into that overhead's pool.

So the decision is made once, at entry, by the person who knows whether the cost can be attributed.

How it behaves

Costs do not all move the same way. So each overhead is classified.

Fixed — the same every period, whatever the activity. Shop insurance costs the same whether you farm 300 acres or 600.
Variable — it moves with activity. It has a rate and a driver, the thing it moves with. Dollars per acre, per head, per machine hour, per mile.
Mixed — both. A flat amount every period, plus a rate on top. Most real costs are this. Most software makes you pretend otherwise.

A driver is defined once — acres, head, machine hours, miles — with its unit of measure. Then every overhead that moves with it reuses that driver.

Predetermined rates

For variable and mixed overheads you can set a budgeted activity for the period. The machine hours you expect to run. The acres you expect to farm.

From that the software works out a predetermined rate: budgeted cost divided by budgeted activity.

That is what lets you cost work during the year. You do not wait for the year to end. You are not guessing at a rate, and you are not stuck until December.

Where it goes

Each overhead carries a distribution. That is a list of enterprises, and the percentage each one takes.

Shop insurance might be 40% corn, 35% cattle, 25% hauling. The office might split on entirely different percentages, because it is a different cost.

You set the percentages, because you are the one who knows.

The software does the arithmetic and applies it the same way every period. The result shows in each enterprise's profit and loss, beside its direct costs.

Worked through

Say shop insurance runs $12,000 a year. Distributed 40% corn, 35% cattle, 25% hauling.

Corn takes $4,800. Over 320 acres, that is $15.00 an acre.
Cattle takes $4,200. Over 150 head, that is $28.00 a head.
Hauling takes $3,000.

Those figures land in each enterprise's profit and loss on their own, every period. Nobody rebuilds a spreadsheet.

And the three add back to $12,000. The distribution is a split of a real cost, not an estimate laid over the top of one.

Where the allocation happens

In reporting, not in the general ledger.

Your general ledger shows shop insurance as a $12,000 expense, where it was actually paid. The enterprise reporting spreads it.

So nothing is posted twice. Your trial balance is not carrying allocation entries. And if you change a percentage next year, you do not unwind journal entries to do it. You change the percentage and the reporting follows.

This matters if you have an accountant who will ask. The allocation is a way of reading the ledger, not a set of entries in it.

Why this matters more than it sounds

An operation that allocates overhead honestly usually finds something out. At least one enterprise it thought was carrying the place is not.

That is an uncomfortable number. It is also the single most valuable thing this software can tell you.