What Are The Different Types Of Overhead Costs In Procurement?

As a procurement professional, you’re always looking for ways to reduce costs and maximize your budget. One area that can have a significant impact on your bottom line is overhead costs. From rent and utilities to salaries and benefits, these expenses can add up quickly and eat into your profits. But what exactly are overhead costs in procurement? In this blog post, we’ll explore the different types of overhead costs you may encounter in procurement and share tips on how to minimize their impact on your operations. So grab a cup of coffee (or tea) and let’s dive in!

Indirect Costs

Indirect costs are those that cannot be directly attributed to the production of a good or service. They are often referred to as “overhead” costs. Indirect costs can include:

-Rent or mortgage payments
-Utilities
-Insurance
-Property taxes
-Maintenance and repairs
-Administrative salaries
-Accounting and legal fees
-Marketing and advertising expenses

Direct Costs

The direct costs associated with procurement are the costs incurred in acquiring goods or services. These costs include the cost of materials, the cost of labor, and the cost of overhead. Overhead costs are those costs that are not directly related to the production of a product or service, but are necessary to the operation of a business. They include such things as rent, utilities, insurance, and taxes.

Allocated Costs

There are indirect costs that are allocated to projects as a result of the decision-making process. Allocated costs are those that cannot be directly traced to the project but are necessary for the overall operation of the business. These types of overhead costs include rent, utilities, insurance, and payroll.

Joint Costs

There are two types of overhead costs in procurement: joint costs and common costs. Joint costs are those that are incurred by the company in order to produce a good or service. Common costs are those that are not directly related to the production of a good or service but are necessary for the company to function.

Sunk Costs

A sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are often used as a basis for decision-making, as they are not relevant to the future course of action. For example, if a company has already spent $1 million on research and development for a new product, it would not make sense to abandon the project simply because it is not profitable. The company would incur an additional sunk cost if it decided to start the project from scratch.

There are two types of sunk costs: direct and indirect. Direct sunk costs are costs that have been specifically incurred for a particular project or activity. Indirect sunk costs are general overhead costs that have been incurred regardless of whether or not the project or activity is undertaken.

The most important thing to remember about sunk costs is that they should not be used as a basis for decision-making. Sunk costs are irrelevant to future decisions and can lead to sub-optimal outcomes.

How to Control Overhead Costs in Procurement?

There are a number of ways to control overhead costs in procurement. The most important thing is to have a clear understanding of what your overhead costs are and where they come from. Once you know this, you can start to look for ways to reduce or eliminate these costs.

One way to control overhead costs is to negotiate better deals with suppliers. This can be done by asking for discounts, negotiating payment terms, or finding other ways to save money on the products or services you purchase.

Another way to control overhead costs is to streamline your procurement process. This means making it simpler and more efficient so that you can get the goods and services you need without incurring unnecessary costs. This can be done by automating repetitive tasks, eliminating manual steps, and standardizing processes across your organization.

Finally, you can also control overhead costs by outsourcing some or all of your procurement activities. This can be a great way to save money if you find a reputable and reliable supplier who can provide the goods and services you need at a lower cost than what you would pay internally.

Conclusion

Overhead costs in procurement can vary greatly, depending on the size of the organization and its particular needs. Understanding these different types of overhead costs can help organizations make better purchasing decisions that are more cost-effective for their operations. It’s important for organizations to identify which overhead costs apply to their situation and develop strategies to manage them appropriately. Taking a proactive approach to managing overhead costs will enable an organization to reduce expenses while still reaping the benefits associated with effective procurement practices.