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Dual Overhead Burden Rate

The dual overhead burden rate method of job costing/pricing is considered the most accurate method developed to determine your company's burden rates to enable the proper pricing of your job or product. This is due to the fact that the dual overhead rate method applies a company's burden costs to both direct labor and the sum of Materials, Equipment, Subcontractor and Other (MESO). The TASCON® Business Analyst calculates the dual overhead burden rates automatically in one "click". Most companies use a single overhead burden rate that allocates all of their burden costs to direct labor only. Unfortunately, most don't know how to calculate their real "costs of doing business" and the burden rates they use are "rules of thumb", those used by others or from some other source.

The Dangers of Using a Single Overhead Burden Rate System

If you use the single overhead burden rate system to price and bid your work, for those jobs and/or products that use a disproportionately higher amount of direct labor than your company's average percentage, you will be overpricing your work and probably won't be awarded any of these contracts. Conversely, for jobs and/or products that use a disproportionately higher amount of MESO than your company's average percentage, you will be under pricing your work and lose money. Unfortunately, you won't even realize it since jobs and/or product hard costs are typically checked and controlled by comparing the estimated hard costs to the actual hard costs as a job progresses or a product is manufactured.

Undetectable Profit Fade

This phenomena is one of the main reasons that many contractors and manufactures experience undetectable profit fade. Businesses using the single burden rate method will find that they will routinely get the work where the direct labor percentage is near their company's average and unfortunately they will also get much of the work where the direct labor percentage is less than their company's average. These company's will always have trouble maintaining their margins and achieving their profit goals.

(Sample calculations from The TASCON® Business Analyst SaaS)

Dual Overhead Burden Rate Multipliers

Your Track to Profit™
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