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Question: Should we make an effort to separate general and administrative expenses and then allocate them monthly by some consistent method?

Gary Elekes; EGIA faculty member and CEO of iMarket Solutions:

Well that’s a good question. How detailed you want your reporting to be is really the first place I would start. To me, there’s lots of different ways to do accounting. There’s managerial accounting, which is generally what we teach through EGIA. There’s cost accounting, which is typically what you would have seen on the manufacturing and distribution levels.

So, there’s different ways that you can approach the allocation. I’m going to assume this is a contractor question, not a distributor question. The best answer for us as a trade is that we would not separate general and administrative expense. We would separate them based on the functional and operational areas of business.

There are five categories that we would look at: marketing, vehicle, equipment, administrative, and labor. For those five categories, we would have sub-legers and they would all be slaves to the master leger.

That’s where the KPIs have been organized and the reason that it set up that way is pretty simple – labor drives overhead in the contract trades. Because of that, we want a microscope to be put on how labor is changing the variable cost of the overhead.

Looking at those types of five functional areas and then looking at the variable side is what’s going to tell you about how well or poorly you’re pricing is covering the up the sins of your overhead per day.

The gross profit dollars per hour for service, for example, we’re looking for $100 gross profit per hour of service. If my overhead is $65 or $70, I feel pretty good about that. If I’m producing $65 or $70 gross profit per hour and my overhead is $65, I’m not feeling good about that. I would want to drill in and see what’s going on.

The second part of that question is allocation and that’s beyond the time limit we have on this particular discussion, but it’s driven by labor. It’s direct expense, obviously. If you buy it, you own it, and then labor. Those are the two methods we’d start with and the last would be discretionary.

I would organize that and keep that consistent. The main thing is, when you allocate your overhead, do it on a consistent basis so you’re not flip-flopping year-to-year so that your comparisons are there, your pricing strategies are sound. There’s a lot that goes into that question.

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