Example of Applying Periodic Adjustments to Overhead Calculations
The following table shows an example of multiple adjustments in a periodic adjustment factor. Notice that the adjustment factor value can be a positive or negative value, or it can be 0 for a timeframe in which an adjustment isn’t required.
| Start Date | Adjustment Factor Value |
|---|---|
| November 2021 | 7% |
| December 2021 | 6% |
| January 2022 | 0% |
| February 2022 | 8% |
| March 2022 | 2% |
| April 2022 | -3% |
The periodic adjustment factor was assigned to an overhead method set up to initially calculate overhead based on 5% of costs. At the end of each month, before running the process to calculate overhead, the joint venture accountant runs the process to adjust the percentage in the overhead method according to the adjustment value for that month. Here’s how the percentage in the overhead method is updated each month.
| Start Date | Base Overhead Percentage | Adjustment Value | Adjustment Calculation | Adjusted Percentage in Overhead Method |
|---|---|---|---|---|
| November 2021 | 5.0000% | 7% | (0.05 * (1+0.007)) = 0.05035 | 5.0350% |
| December 2021 | 5.0350% | 6% | (0.05035 * (1+0.006)) = 0.0506521 | 5.06521% |
| January 2022 | 5.06521% | 0% | No adjustment | Same as previous |
| February 2022 | 5.06521% | 8% | (0.0506521 * (1+0.008)) = 0.05106045 | 5.106045% |
| March 2022 | 5.106045% | 2% | (0.05106045 * (1+0.002) = 0.05116257 | 5.116257% |
| April 2022 | 5.116257% | -3% | (0.05116257 * (1-0.003) = 0.05100908 | 5.100908% |
You might have a scenario in which the accountant forgets to process overhead charges, for example for February and March. In April, the accountant can run the overhead adjustment process once, entering a date range from February through April to adjust the percentage in the overhead method for each month accordingly. When the process to calculate overhead is eventually run in April, the overhead charges for each month are calculated using the adjusted percentage for each month. However, if overhead charges were already calculated for the months of February and March with unadjusted overhead percentages, then those overhead charges will not be recalculated.