Overhead costs are expenses that are not directly attributable to the automotive repair process or the cost of tracking them directly is not practical. They are a part of the cost of doing business and must be considered when developing future business plans. Some overhead costs are fixed. That is they don’t fluctuate from period to period. Other overhead costs are variable in that they will rise and fall due to business mix or volume. Following are keys to identifying and projecting overhead costs:
- Identify Fixed and Variable Overhead Costs – When resource planning it’s important to itemize overhead costs. The cost of business in auto repair can be classified as direct cost or indirect cost. Direct costs are practically quantifiable and relate specifically to the repair process. Labor and parts are direct costs. Expendable supplies used during the repair process could be considered direct but generally the cost of keeping track of them specifically is not practical. So they’re usually treated as indirect costs. Then the other costs such as rent, utilities are considered indirect. Indirect costs are classified as overhead.
- Identify Fixed and Variable Overhead Costs – A fixed overhead cost is the same each accounting period. Rent is an example of a fixed overhead cost. Variable overhead costs change as business volume changes. For example an increase in business will result in an increase in electricity usage. Bonuses based on sales volume will change and are therefore variable.
- Quantify Anticipated Changes in Fixed Overhead – Fixed overhead costs may not remain the same. Future cost increases in fixed overhead should be estimated for planning purposes.
- Project Variable Overhead Costs – Costs that rise and fall with business volume should be projected based on anticipated sales numbers. Sales growth is the objective and a corresponding increase in variable overhead costs should be taken into consideration when planning.