Example of Using a Rate Based Overhead Method with a Sliding Scale
In this example, a managing partner sets up a rate based overhead method with a sliding scale to calculate the overhead for a joint venture. The joint operating agreement includes the following terms for the overhead calculation:
- Use units of water consumed in the joint venture operations as the basis for the overhead calculation.
- Calculate overhead using the following sliding scale: $5 per unit of water for the first 100 units; $4 a unit for the next 100 units; $3 a unit for the remaining units.
- Base overhead calculation on a year to period timeframe.
- Overhead charge not to exceed $5000 for the year.
When setting up the overhead method for the joint venture, the managing partner specified the following details:
- Effective dates for the overhead method.
- The ownership definition to use for the distribution of the calculated overhead amount.
- Identification of “Water” for the operational measure type, to use water measures as the basis for the overhead calculation.
- A sliding scale of rates, as outlined in the JOA, to use for the overhead calculation.
- A $5,000 maximum overhead amount.
- A period designation so that the process to calculate overhead uses only operational measures recorded from the beginning of the year to the period selected when running the process.
The following table shows the operational measures that the managing partner captured for the joint venture. Measures for water and electricity were recorded, but as outlined in the JOA, only water measures will be used in the overhead calculation.
| Measure Type | Measure Date | Measure Value | Unit of Measure |
|---|---|---|---|
| WATER | 12/14/2020 | 6.00 | Units |
| WATER | 1/14/2021 | 240.00 | Units |
| ELECTRIC | 1/15/2021 | 16.00 | Units |
| WATER | 1/31/2021 | 322.00 | Units |
| ELECTRIC | 2/14/2021 | 28.00 | Units |
| WATER | 2/15/2021 | 267.00 | Units |
| WATER | 2/28/2021 | 308.00 | Units |
| ELECTRIC | 3/15/2021 | 21.00 | Units |
| WATER | 3/15/2021 | 280.00 | Units |
| WATER | 3/31/2021 | 374.00 | Units |
| WATER | 4/14/2021 | 310.00 | Units |
At the end of January, the managing partner ran the process to calculate overhead, using the “Year to period” option. The following table shows the sliding scale used to calculate overhead based on the 562 units of water used in January.
| Operational Measure | Rate | Calculation |
|---|---|---|
| 100 | $5 | 100 x 5 = 500 |
| 100 | $4 | 100 x 4 = 400 |
| 362 | $3 |
362 x 3 = 1086 January overhead total = $1986 |
The next time the managing partner ran the overhead process was at the end of March, using the same “Year to period” option. The process calculated the overhead based on 1791 water units, the total amount of water used from the beginning of January through the end of March.
| Operational Measure | Rate | Calculation |
|---|---|---|
| 100 | $5 | 100 x 5 = 500 |
| 100 | $4 | 100 x 4 = 400 |
|
1029
|
$3
|
1591 x 3 = 4773 Overhead total = $5673 |
Typically, the process would subtract the January overhead amount that was previously calculated and distributed from the overhead total. But in this instance, the maximum overhead amount for the year to period exceeded the $5000 maximum overhead amount. Therefore, it created a transaction with an amount of $3014, which is the maximum amount minus the January amount. This amount was then distributed to the partners according to their percentages of ownership in the ownership definition associated with the overhead method.