What is the proper way to allocate my overhead when departmentalizing?

A Contractor University Member recently utilized the Ask-The-Expert Q&A feature within the member dashboard by submitting the following question and received the response below.

Contractor Question:

“What is the best way to allocate funds when departmentalizing?”

Contractor University Expert Response:

“Start by directly allocating expenses to a specific department, such as service vehicles. If a vehicle serves multiple departments, split the costs based on usage or tracked hours. For example, if you’ve got a vehicle that migrates between service and installation and puts 50% of it in service and 50% of an installation, you can split it that way.

Review your Profit and Loss statement line by line for more ambiguous costs. Estimate management and administrative roles’ percentages based on the time they spend on each department.

Labor is usually the most reliable driver for overhead allocation. Use direct labor costs to guide how you distribute shared expenses. Consider using labor hours to proportion costs like utilities for overhead that can’t be directly allocated. For advertising, assign costs based on the campaign’s focus. If it targets one department, allocate it there; distribute it evenly if it covers multiple areas.

Getting your financials right is definitely worth the effort.”

Contractor University members can click here to log in to their member dashboard and submit a question through the Ask the Expert portal.