What are some of the best practices for managing and reducing overhead costs? (2024)

One of the key tasks of cost accounting is to allocate overhead costs to the products or services that consume them, using appropriate cost drivers and allocation bases. This helps to measure the true cost and profitability of each product or service, and to identify the sources of inefficiency and waste. It also enables better pricing, budgeting, and decision making. To allocate overhead costs accurately, you should use a consistent and logical method, such as activity-based costing (ABC), which assigns costs based on the activities and resources that each product or service requires.

Another important practice is to track and analyze overhead costs regularly, using relevant and reliable data and tools. This helps to monitor the performance and trends of overhead costs, and to identify any deviations or anomalies that may indicate problems or opportunities. It also helps to evaluate the effectiveness and efficiency of the allocation method and the cost drivers, and to make adjustments if needed. To track and analyze overhead costs regularly, you should use a dashboard or a report that shows the key metrics and indicators, such as the overhead rate, the overhead variance, and the overhead absorption.

A third practice is to eliminate or minimize unnecessary overhead costs, by applying the principles of lean management and continuous improvement. This means to eliminate any activities or resources that do not add value to the customers or the business, such as excess inventory, idle capacity, duplication, errors, or delays. It also means to minimize the costs of the necessary activities or resources, by optimizing the processes, systems, and standards, and by seeking for ways to reduce waste, increase efficiency, and enhance quality. To eliminate or minimize unnecessary overhead costs, you should use tools such as value stream mapping, kaizen, or 5S.

A fourth practice is to optimize the use of resources and technology, by leveraging the opportunities and advantages that they offer. This means to use the resources and technology that are most suitable and effective for the business needs and goals, such as outsourcing, automation, cloud computing, or artificial intelligence. It also means to use them in a smart and sustainable way, by avoiding overuse, misuse, or obsolescence, and by ensuring security, reliability, and compatibility. To optimize the use of resources and technology, you should use tools such as cost-benefit analysis, benchmarking, or life cycle costing.

A fifth practice is to align overhead costs with strategic objectives, by ensuring that they support and contribute to the vision, mission, and values of the business. This means to align the overhead costs with the customer expectations and preferences, the market conditions and opportunities, and the competitive advantages and differentiators. It also means to align the overhead costs with the organizational culture and values, such as innovation, quality, or social responsibility. To align overhead costs with strategic objectives, you should use tools such as balanced scorecard, strategic cost management, or target costing.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Accounting

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