To Allocate Overhead or Not

As Entrepreneurs set up separate business units to grow their companies, holding managers of such units responsible for P&L results becomes important. Most compensation systems reward business unit managers based on P&L results.

If the business units are totally separate and self-contained, the P&L is mostly complete, eliminating the need for allocating any overhead costs.

However, if the business unit receives significant support from corporate staff, such as Accounting, IT, HR, Marketing and so on, or shares office space, then an allocation of such support/space costs to the business unit P&L seem fair. The objective would be to evaluate the business unit results as an independent unit.

Corporate overhead allocations are often controversial, so care should be given to making them as fair as possible when such allocations are necessary.

Ravi Patel

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