How to Allocate Expenses
Managing and controlling expenses is paramount to any business. Following the accrual system in which you record expenses as they occur and not when you actually pay them will help you keep track of expenses.
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Instructions
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Identify all expenses for the period. These include employee salaries and wages, utilities and other expenses, such as depreciation. Categorize these into fixed or variable expenses. Wages classify as variable expenses, while rent is a fixed expense because the amount remains the same month-to-month no matter your level of production.
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Record inventory expense. There are several ways to account for inventory costs: first-in, first-out; last-in, first-out; and average cost. If you use first-in, first-out, you assume the first units you place in inventory are the first sold as cost of goods sold. Last-in, first-out assumes the most recent batch of items you purchase as inventory are the first sold. For instance, if you produce 1,000 widgets on Day One at 50 cents each and another 1,000 at 62 cents apiece on Day Two, the amount charged to cost of goods sold is $500. If you only sell 200 of the widgets, you still have 800 widgets worth $400 (0.5 x 800) available for sale on Day Two.
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Allocate sales commissions directly the month earned, not in the month you actually pay the commission. For instance, if a salesman earns a $10,000 commission in June that he expects to receive in July, record the commission expense in June. Likewise, if an employee earns a bonus of $20,000 in 2011 but will not receive payment until 2012; record the bonus expense in 2011.
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Record salary and wage expense in the month earned. For instance, if the pay period ends on May 28 but employees continue to earn wages through May 31, payable to them on June 3, you should record May salaries earned from May 29 to May 31 as part of May's expenses.
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Allocate depreciation expense every month to record wear-and-tear of company equipment. For instance, if you purchased a piece of equipment for $100,000 with a 10-year service life, using straight-line depreciation, allocate $10,000 toward depreciation expense each month ($100,000 divided by 10).
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Tips & Warnings
Businesses are free to choose between cash-basis accounting and the accrual method. Cash basis may accurately show an organization's cash position but not necessarily its long-term profitability, which is perhaps why large companies prefer the accrual method. The accrual method is more flexible because it follows the natural ups and downs of business cycles and is a better indicator of income and expenses. However, under the accrual method, you must monitor your cash careful because it may not be apparent how much cash reserve you have available.
References
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