Allocation of Overhead Expenses

Marshall and Ilsley Bank is a financial institution that offers various services to customers, such as deposit products, loans, and various investment options. This means that the company is primarily a service based organization; because each branch operates independently from one another, it is important to break down overhead allocation on a per branch basis. Each branch has two major types of overhead to consider. The first major overhead type is fixed overhead such as salary costs, property costs, and various occupancy costs such as insurance and depreciation. Since these costs do not change from month to month, they should be allocated based upon the department that is directly servicing the customer. These departments can be broken down into the types of service that a branch could offer such as retail, business, mortgage, and investment products. The overhead could then be allocated based upon the specific percentage of customers who each department services.

The second type is variable overhead that would include the energy utility costs, marketing, hourly wages for support services departments, and the various materials needed for day-to-day operations such as pens and paper, for example. Due to the fact that each department handles their own customer base, the allocation for variable overhead should be allocated based upon the hourly rate for each department’s staff members to determine the total hours that are worked for each client the branch services. The total hours that are worked for each client should then be allocated based upon the total wages paid to employees. This assumes that there is a direct relationship between employee wages and the amount of overhead used by employees to service customers in each department.

References

Horngren at el. (2008). Introduction to Management Accounting (14th ed.). New Jersey: Pearson-Prentice Hall.