Examples of Using a Percentage of Cost Overhead Method to Calculate Overhead
In this example, a managing partner sets up overhead methods to calculate overhead for the following two joint ventures according to the joint operating agreement (JOA) for each joint venture:
- Joint Venture A, with a JOA that stipulates to calculate overhead using the percentage of costs for the year to period with a maximum amount.
- Joint Venture B, with a JOA that stipulates to calculate overhead using the percentage of costs for the inception to period with a maximum amount.
The following financial details are the same for both joint ventures:
- The costs that overhead calculations will be based on are recorded in a separate ledger than the ledgers of the joint ventures.
- The chart of accounts structure for the ledger is Company, Cost Center, Account, and Intercompany.
- The costs are recorded under accounts for Company 10 and Cost Center 5000.
Joint Venture A: Percentage of Costs for the Year to Period with a Maximum Amount
The managing partner set up an overhead method for Joint Venture A in accordance with the following terms in the agreement for charging overhead:
- 2% of equipment lease and maintenance costs to be charged as overhead
- Overhead amount to be distributed equally among the partners
- Overhead calculated as a running total for the calendar year (using the “Year to period” option in the overhead method)
- $20,000 maximum overhead charged per year
To identify the accounts for recording lease and maintenance costs, the managing partner created an account set and associated it to the overhead method. The following table shows the account information in the account set:
| Company | Cost Center | Account |
|---|---|---|
| 10 | 5000 | 540020 to 540030 |
| 10 | 5000 | 540120 to 540130 |
The following table shows the recorded lease and maintenance transactions which will be used as a basis for the overhead calculation:
| Account | Description | G/L Date | Amount |
|---|---|---|---|
| 10.5000.540120.000 | Small Field Equipment Lease | 1/31/2021 | $25,000.00 |
| 10.5000.540030.000 | Large Field Equipment Lease | 1/31/2021 | 83,500.00 |
| 10.5000.540120.000 | Small Field Equipment Maintenance | 1/15/2021 | 416.67 |
| 10.5000.540130.000 | Large Field Equipment Maintenance | 1/25/2021 | 750.00 |
| 10.5000.540120.000 | Small Field Equipment Maintenance | 2/5/2021 | 250.00 |
| 10.5000.540130.000 | Large Field Equipment Maintenance | 2/25/2021 | 1,200.00 |
| 10.5000.540120.000 | Small Field Equipment Maintenance | 3/10/2021 | 375.00 |
| 10.5000.540130.000 | Large Field Equipment Maintenance | 3/14/2021 | 1,800.00 |
The managing partner ran the process to calculate the overhead amount twice, at the end of January and at the end of March. Here are the results:
- In the January run, the process multiplied the sum of the January transaction amounts by 2% for a total of $2193.33, which was distributed to the partners.
- In the March run, the process multiplied the sum of all transactions from the beginning of the calendar year to the end of March by 2% for a total of $2265.83. It then subtracted the previously calculated and distributed January amount and distributed the difference of $72.50 to the partners.
Because the $20,000 maximum amount for overhead for the year wasn’t reached, the managing partner will continue to run the process to calculate overhead in the next period.
Joint Venture B: Percentage of Costs for the Inception to Period with a Maximum Amount
The managing partner set up an overhead method for Joint Venture B in accordance with the following terms in the agreement for charging overhead:
- 5% of equipment lease and maintenance costs from the inception of the joint venture on June 1, 2019 to be charged for overhead.
- $6,000 maximum overhead charged from the inception of the joint venture.
- Overhead amount to be distributed equally among the partners
To identify the accounts for recording lease and maintenance costs, the managing partner created an account set and associated it to the overhead method. The following table shows the account information in the account set:
| Company | Cost Center | Account |
|---|---|---|
| 10 | 5000 | 535502 |
| 10 | 5000 | 535602 |
The following table shows the recorded lease and maintenance transactions:
| Account | Description | G/L Date | Amount |
|---|---|---|---|
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 7/1/2019 | $166.67 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 7/15/2019 | 200.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 8/15/2019 | 156.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 9/15/2019 | 47.69 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 10/15/2019 | 110.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 11/15/2019 | 75.67 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 12/15/2019 | 150.67 |
| 10.5000.535502.000 | Office Equipment Leases | 12/30/2019 | 20,850.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 1/15/2020 | 166.67 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 2/15/2020 | 200.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 3/15/2020 | 156.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 4/15/2020 | 47.69 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 5/15/2020 | 210.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 6/15/2020 | 75.67 |
| 10.5000.535502.000 | Office Equipment Leases | 6/30/2020 | 20,850.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 7/15/2020 | 166.67 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 8/15/2020 | 200.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 9/15/2020 | 156.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 10/15/2020 | 147.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 11/15/2020 | 110.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 12/15/2020 | 75.67 |
| 10.5000.535502.000 | Office Equipment Leases | 12/30/2020 | 20,850.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 1/15/2021 | 35.67 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 2/15/2021 | 200.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 3/15/2021 | 156.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 4/15/2021 | 47.69 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 5/15/2021 | 310.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 6/15/2021 | 75.67 |
| 10.5000.535502.000 | Office Equipment Leases | 6/30/2021 | 20,850.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 7/15/2021 | 166.67 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 8/15/2021 | 200.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 9/15/2021 | 231.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 10/15/2021 | 67.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 11/15/2021 | 110.00 |
| 10.5000.535602.000 | Repair and Maintenance - Leased Office Equipment | 12/15/2021 | 75.67 |
| 10.5000.535502.000 | Office Equipment Leases | 12/30/2021 | 20,850.00 |
The managing partner had already run the process to calculate overhead for the costs recorded prior to 2021, which resulted in the following overhead charges:
- December 2019 overhead charge - $2141.48
- June 2020 overhead charge - $1095.53
- December 2020 overhead charge - $ 1101.30
At this point, a total overhead amount of $4338.32 was charged to the joint venture partners.
The managing partner ran the process again at the end of 2021 to include the remaining costs incurred through the end of the year in the overhead calculation. The process calculated the overhead using all transactions from the inception of the joint venture through the end of 2021 with these results:
- The total was $6467.90.
- Of this amount, $4338.32 had been previously charged to the joint venture partners.
- The processed overhead method was defined with a maximum overhead amount of $6000 as stipulated in the terms of the joint venture. Therefore, the process calculated the remaining amount by subtracting $4338.32 from $6000, resulting in a final overhead charge of $1661.68.