What Is in the Pool
The overhead pool is a list of costs nobody can attribute directly. What should be in it, what should not, and why the contents decide the argument.
An overhead pool is a list of costs that cannot be attributed directly to a job and must therefore be spread. The spreading mechanism gets all the attention; the contents of the pool decide the answer, and in most organisations nobody has read the list.
The calculation in “What Is in the Pool” depends on reliable source records as well as a documented accounting rule. For organisations researching time tracking software, see the official setup information can supply consistent time and project context, while the allocation basis and financial interpretation remain decisions for the organisation and its advisers.
Reading it aloud, line by line, is an hour that changes most people's view of what their work costs.
The assumptions behind “What Is in the Pool” can also be checked against Xero business resources. Record which guidance applies to the real workflow and which points require professional advice.
What belongs
Costs that are real, recurring, and not attributable to any particular job: management above the working supervisor, finance, HR, IT systems, premises where shared, insurance beyond the per-head element, professional fees, and central functions.
- Management above the working supervisor.
- Finance, HR and central administration.
- IT systems and shared software.
- Premises, where shared.
- Insurance beyond the per-head element.
- Professional fees and central functions.
Seven families, all genuinely shared.
What should be traced instead
Anything attributable. If a cost can be traced to a job, a customer or a product with reasonable effort, tracing it is better than spreading it.
The pool should be the residue after tracing, not the default destination.
The six things that get in and should not
Materials. Machine cost. Subcontract. Selling cost. One-off and exceptional items. Last year's under-recovery.
Each has its own treatment and each is covered in the note on what stays out of the rate; the pool is where they end up when they have nowhere else.
The management line
The largest and the most contested. Where a supervisor spends most of their time on identifiable jobs, they are direct and belong on the jobs. Where they manage rather than work, they are pool.
Most supervisors do both, which means a split is needed and almost never exists.
Splitting a supervisor
From their own timesheet, with a kind-of-work field, over a representative period. The share that was job work goes direct; the rest goes to the pool.
It is one query and it frequently moves several per cent of total cost between categories.
Central charges
Costs allocated down from a parent organisation: group IT, group finance, a management charge. Real to the entity and uncontrollable by it.
They belong in the pool, named separately, because they behave differently from costs the operation can influence and because people will ask.
Depreciation and leases
Whether they belong depends on what the asset serves. A shared building is pool; a machine serving one line is closer to direct.
The accounting treatment and the costing treatment can differ legitimately, and where they do it should be written down.
How large a pool should be
As a share of direct labour cost, the pool typically runs from thirty to over a hundred per cent depending on the sector. The number itself is not diagnostic.
What is diagnostic is whether it has grown faster than direct cost over several years, which it usually has.
Publishing the list
Line by line, with amounts, to the people whose work carries it. This is unpopular and it is the single most effective way to get the pool scrutinised.
A pool that nobody outside finance has seen is a pool that only grows.
Reading the pool once a year
Each line: is this still real, is this still unattributable, is this still the right size, who owns it.
Four questions, perhaps thirty lines, one morning. It typically finds two costs that stopped and one that should have been traced directly.
Pools that contain other pools
In larger organisations a local pool often contains an allocation from a group pool, which contains an allocation from somewhere else. By the third layer nobody can say what any of it is.
Showing the chain — this much is ours, this much arrives from group, this much from the region — is more honest than a single figure, and it tells people which part anybody can actually influence.
The line that is somebody's whole department
Worth naming rather than aggregating. "Quality: £86,000" is a fact people can discuss; "other central costs: £240,000" is not.
Aggregation in the pool is where scrutiny goes to die, and the level of detail that invites questions is the level worth publishing.
The pool that grew while direct cost fell
The pattern worth watching across several years. Direct labour has been reduced, automated or outsourced; the pool has not, because nothing in those programmes touched it.
The overhead rate rises accordingly, and the next round of efficiency work is aimed at direct labour again because that is where the costing system points. Tracking the ratio over five years is what breaks the loop.
Why the contents matter more than the base
Because changing the allocation base moves cost between jobs, while changing the contents moves the total. An argument about the base is about fairness; an argument about the contents is about money.
Most organisations have the first argument annually and the second never.