Assignment Method of Overhead Allocation

The assignment method bases overhead allocation on a percentage that you specify. This overhead percentage is applied to each project, based on either direct labor or revenue, to determine the total amount of overhead allocated to each project.

Calculation

The assigned overhead rate can be entered in three different places in DPS. The following hierarchy determines which rate DPS uses to allocate overhead on a project-by-project basis:

• If a rate is defined in the Projects hub for an individual project, phase, or task, DPS uses that rate.
• If no rate is defined in the Projects hub, and the project, phase, or task is assigned to an organization, DPS uses the rate defined for the organization on the Overhead tab in Settings > Organization > Individual.
• If no rate is defined in the Projects hub or in Organization Settings, DPS uses the enterprise-wide overhead rate defined in Settings > Accounting > Overhead Allocation.

DPS uses the following formula to calculate the overhead for each project:

Year-to-Date Project Direct Labor or Revenue * Assigned Overhead Percentage = Overhead Allocated to Project

Pros and Cons

With assignment, the sum of all allocated amounts is not necessarily equal to your enterprise-wide overhead amount. DPS accumulates the difference in an Overhead Variance project. The assignment method is more widely used than the proration method, because it allows you to generate a consistent overhead amount for each project and it prevents overhead allocation from fluctuating wildly from period to period. This makes it easier to forecast project performance.

You have the option of overriding the enterprise-wide percentage for individual projects, so that they receive overhead at a higher or lower rate than the norm.

Overhead Variance Project

If you intend to use the assignment method, you must create an Overhead Variance project to maintain the appropriate accounting balance between the project and general ledger sides of DPS. This project absorbs the difference between the total year-to-date overhead assigned to projects and the enterprise’s actual total indirect expenses.

Variance amount = Actual total indirect expenses incurred - Total year-to-date overhead assigned

By looking at the variance amount that accumulates, you can judge whether the assignment percentage that you are using is appropriate.

Example

For example, assume that you choose to allocate overhead at a rate of 10%, based on direct labor. The City Hall project has $20,000 in year-to-date direct labor charges.

Overhead Allocation Rate

The overhead allocation rate is 10%.

Overhead Allocated to the City Hall Project

YTD Direct Labor (20,000) * OH % (10) = 2,000

The City Hall project is allocated $2,000 of overhead.