Question

If I have Corporate Overhead costs relate to the corporate administration of the company as a whole. This company has three segments. In the income statement , should these costs to be divided on three segment? if yes, base and what should we allocate that cost ? and why?

Answer 1

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Corporate overhead is constituted of the charges incurred to run the executive facet of a business. These charges consist of the accounting, human resources, legal, marketing, and income functions. When company charges are incurred, they're taken into consideration to be length charges, and so are charged to expense as incurred. Unlike manufacturing facility overhead, company overhead isn't always amassed into a fee pool and then allocated to the range of devices produced.

The idea of company overhead is really special in a multi-subsidiary employer. In this situation, company overhead is taken into consideration to be the fee to function the company determine. The human beings operating at the determine entity are engaged in such sports as placing guidelines and approaches for the subsidiaries, reporting consolidated results, and attractive in merger and acquisition sports. The control of the employer can also additionally select to allocate those overhead prices to the subsidiaries owned through the determine, primarily based totally on a few pastime measure, together with the sales or profits of the subsidiaries. This accounting remedy isn't always recommended, because it skews the reported profitability of the subsidiaries, hiding their proper profitability. A higher technique is for the prices of the company determine to be right now charged to cost and not using a allocation elsewhere.

Corporate overhead refers to all costs not associated with the the production of a product or service.

Common Fixed Expenses

One of two main categories of corporate overhead includes fixed expenses. Fixed expenses are those that are not contingent upon how a business performs during any particular period. In other words, fixed expenses remain the same whether a business sells a thousand or a million products.

Common fixed expenses include rent or mortgage payments, asset depreciation, insurance policies, payroll and legal fees. Usually, the only time fixed expenses change are when events contract issuances such as a lease being renewed takes place, and even then the changes are marginal.

Common Variable Expenses

Variable expenses are those that fluctuate on a monthly basis and are often directly affected by sales. For example, a business may temporarily increase its advertising expenses while promoting the launch of a new product.

Other common variable expenses include telecommunications costs, office supplies, packaging materials, mailing fees and printing costs. It is not unreasonable to expect all of these variable expenses to increase as the company sells more products and decrease when it sells fewer.

How to allocate ?

When conducting cost accounting, each division should probably bear some of the cost of the company’s corporate headquarters. Because without the work done by the divisions, there wouldn’t be a need for the corporate headquarters at all. However, corporate (head-office) costs can be hard to allocate to divisions.

Here are some typical corporate costs that are allocated:

· Interest expense on company loans

· Salary, benefits, and other costs for human resources, accounting, and legal staff

· Salary, benefits, and other costs for administrative staff

· Head-office building costs: utilities, insurance, and maintenance

Our decision about allocation boils down to three choices:

· Allocate the entire corporate cost to the divisions.

· Don’t allocate any corporate cost to the divisions; use the corporate cost only to evaluate company-wide financial results.

· Allocate some of the corporate costs based on a method that justifies a partial allocation.

1) Say we determine that the head office exists entirely to support the divisions. To fully price each division’s product, each division should receive a corporate cost allocation. We “capture” all of the costs to make our product (in this case, refrigerators).

2) The second choice is to not allocate any corporate costs. It argues that because the divisions have no control over the spending at corporate headquarters, they shouldn’t get an allocation. Now, that doesn’t mean that the costs disappear, of course, but this choice will make the division managers happy.

Corporate costs are sometimes called common costs. Because these are costs that the firm as a whole incurs, we may not be able to readily assign them to a specific division, department, product, or unit. So we show the common costs at the bottom of our income statement. This way, readers of the profit and loss statement (P&L) can see that those corporate costs aren’t directly related to either the residential or the commercial division.

3) The final option is to allocate some of the costs. Essentially, any corporate cost we can justify allocating gets allocated. We justify the allocation by finding a cause and effect. Any cost we can’t justify allocating to the divisions remains an unassigned corporate cost. These unassigned costs are shown at the bottom of the income statement, similar to the costs in the table.

We can also consider allocating costs if the division has some control over those costs. For example, insurance costs for all company buildings are paid through the head office. However, say each division works with the insurance company. The division determines the amount of insurance coverage and policy details. Because the division has some decision-making ability, it’s reasonable to allocate those costs to the divisions.