Steps to Calculating Overhead Multiplier

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BQE Core’s Usage of Overhead Multiplier

Company’s may calculate and change their overhead multiplier quarterly or yearly and they may also handle billing and time entry differently. Generally, the calculation of Bill Rate is done using the following formula.

Bill Rate = (Profit + Overhead Multiplier) x Direct Personnel Expense

While Overhead Multiplier is calculated using:

Overhead Multiplier = (Expenses in Total + Allowance for Doubtful Accounts) / (Direct Labor + Direct Expenses)

Certain government departments limit profit by not allowing the creation of any allowance for doubtful accounts. In light of your contracts and/or practice, Direct Labor costs are either incurred through salaries or direct personnel expense.

These calculations can also be done through the General Ledger, special accounts for Direct and Indirect Labor, and other data from bookkeeping. This uses a simple formula:

Overhead Multiplier = Sum of Indirect Expenses/Sum of Direct Labor

Things BQE Core and QuickBooks Users Should Know

If you are using QuickBooks as your business’s accounting software, while integrating with BQE Core, you need to ensure that you send the cost (in terms of time) to the correct accounts. Your activity codes should be mapped in order that direct and indirect time is easily distinguishable. Also, ensure that you separate Direct Expenses from Overheads. Again, Proper Mapping is highly recommended.

Activity Codes for overhead activities can be very different from the ones for direct project expenses. Furthermore, different Activity Codes are also needed for Indirect and Direct time.

In some cases, your firm may have employees who don’t enter their work times in BQE Core. These people have categories of activity, which are known as outside project. These categories are later summed up and included in the Indirect Labor account in the General Ledger. If you want to see information for each individual category, you can check it in the project reports you get.

The activity codes you set are key as the mapping that connects QuickBooks and BQE Core is highly dependent upon them. After the codes have been set up properly, the staff simply needs to enter their details in the activity that relates the most to their tasks. There is no need for them to have in-depth knowledge regarding mapping or accounting. Firms with smaller projects usually find the tasks related to activity codes pretty tedious.

Sometimes, companies need to distinguish between billable/non-billable and chargeable/non-chargeable expense and time. For example, an expense might be non-billable, however it can be still charged as an expense to a project since it would be in the cost of doing that project. The client might not be billed for it, but the identification of expense is necessary.

In BQE Core, you can select an option to assign a project to a particular ‘Overhead’ Contract Type. This option is utilized for some internal work, for example: office renovation or marketing.  The expense is treated like a regular project. Similarly, several small projects can use the same activity codes. You can exclude and delete the codes that aren’t relevant.

This is all done simply to allow you to breakdown the project into smaller, more manageable tasks, making it easier to put together and track your budget. It can be made even easier if everyone in your firm who collects a salary can enter time in BQE Core. This will give you a more accurate look at the hours and the corresponding costs that are required in running your project. It might be unusual for non-project employees to enter their hours in BQE Core, as it is project-centric software. You can also ask them to mark their off days on the next workday in order to process their payroll and track Paid Time Off. After all of that is done, to calculate Overhead Multiplier, simply do the following:

  1. Run Profit/Loss Report for the previous year (12 months) – Take the values of Total Expenses and Total Payroll Expenses
  2. Apply The Formula

Overhead Multiplier = Total Expenses / Payroll Expenses

This will give you a value which will denote the total expenses incurred per every dollar you pay in wages. BQE Core then calculates the default Cost Rate by multiplying Pay Rate for each employee by the Overhead Multiplier. The Cost Rate is used to derive the Cost Amount by being applied to the work hours. When you update the Overhead Multiplier (either quarterly or yearly), new time entries are subject to a recalculated cost rate.

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