USA Overhead Allocation

Feb 8, 2018
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United States
I am an accounting manager in a small healthcare facility, and we need to update all of our overhead rates for a wide variety of services. Overhead costs are easy to identify, the problem I’m having is pinning down the most appropriate cost driver to use for our situation. Up to this point the number of FTE’s has been used, but I don’t think that it is necessarily the most accurate.

Here are some of my perceived drawbacks of using some of the more common cost drivers:
  1. Number of FTE’s - Some departments consistently operate at 50% of their time chargeable time while others average 80%+. Going off of headcount would appear to create a misalignment of overhead to revenue generation.

  2. Chargeable hours (units) - There are wide variations, even within departments, of how much we can charge based on an employees credentials (DR’s obviously bill at a much higher rate than technicians), so using billable hours could result in a disproportionately higher burden on activities performed by lower skilled employees, and vice versa.

  3. Revenue or cost - Some departments use significantly less overhead than others. For example a psychiatrist needs next to no resources other than a 10x10 room to create significant revenue, whereas an surgeon also needs the square footage associated with the OR, a lot more equipment, etc to perform their job. Also, many of the psychiatrists are contracted in where the revenue is nearly all received by the facility but then paid out to the DR, so the revenue is somewhat misleading since we only make a small admin fee in actual profit.
In addition of the above factors some departments end up writing off a large percentage of their billings due to medicare, etc while others incur a relatively small write off due to bad debts or unbillables. On top of everything else, the accounting software is quite old, and while it works the reports leave quite a bit be desired.

So, I know every situation is different…but is there a best practice in this type of environment about the best way to allocate overhead? Any advice would be greatly appreciated.


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Oct 12, 2011
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United States
Not sure if there is a best practice. We used to use Revenue, then expenses, then Assets and then a combination of the three. Always a lot of complaining that it did not align with each business especially when you have different businesses. For instance, we have Mutual funds that have high assets but its a spread business and charging more OH would put them at a disadvantage since it cant be recouped in the spread. So they did not like Assets as the driver. Other businesses didn't like expenses or FTE's since many of the expenses are variable and do not contribute to the bottom line so an increase there meant lower profits.

Finally, we landed on using OH as a kind of tax where the more money you make the more OH you get. Logic being the bigger businesses make the most money and likely use the most internal resources so it seemed appropriate. Not sure you will get a best answer but depends what works for your business and getting senior management aligned around it and stop their complaining!

Note I am in the service industry and for a company with manufacturing OH would probably be thought of differently.

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