DORS is a method used to allocate and recover overhead costs based on different cost drivers. With DORS, not all overhead costs are incurred equally for different activities or services, so overhead expenses are assigned multiple rates.
Here’s how DORS typically works:
- Identify Different Cost “Buckets”: The first step is to identify and categorize the overhead costs into different “buckets” based on what they are. Examples of these buckets could be based on department or function, like administrative overhead or common operating costs like rent or insurance.
- Determine Appropriate Cost Drivers: You have to understand your cost drivers for each “bucket” and how often that cost driver is used. Common cost drivers are labor hours, machine/equipment utilization, vehicle usage or the amount of material used are all common cost drivers.
- Calculate Overhead Rates: Divide total overhead costs in each “bucket’ by the estimated or actual amount of the corresponding cost driver. For example, if the labor overhead costs are $100,000 and the estimated labor hours are 10,000, the labor overhead rate would be $10/hour ($100,000 / 10,000 = $10/hour).
- Assign Overhead Costs to Activities or Services: Apply the overhead rates to the relevant activity or service based on usage. For example, if a service requires 2 labor hours and 2 equipment hours, the overhead cost allocation would be calculated by multiplying the labor hours and overhead rate by the equipment hours and overhead rate.
- Calculate the Total Cost of Activities or Services: The overhead costs assigned to each activity or service are added to the direct material and direct labor costs to determine the total cost. This provides a more accurate representation of the true cost of each activity or service.
- Analyze and Evaluate: DORS allows for a more detailed analysis of overhead costs when compared to SORS, because it considers different cost drivers and their impact on various activities or services. This information can be used to identify areas of high overhead consumption, evaluate profitability by activity or service, and make informed decisions regarding resource allocation and pricing strategies.
By utilizing DORS, businesses can better allocate overhead costs based on the specific activities or products that drive those costs. DORS recognizes the differences in overhead expenses and provides a better understanding of cost behaviors, allowing for more accurate decision-making and cost control measures. DORS is a superior estimating system compared to SORS, yet, it’s still flawed.
Flaw #1 – You still need to manually calculate your ‘mark-ups’ which should be based on your total budget. You can’t just make these numbers up, or you’ll definitely be losing money. This can be really difficult (read: impossible) to figure out, because you’d need to consider a bunch of factors, and weigh them all differently. For example, each piece of equipment has a different price, different utilization amount, different lifespan and different maintenance costs and requirements. Manually calculating all of these actual costs is nearly impossible.
Flaw #2 – With DORS, all of your equipment costs are placed in the same “bucket.” For landscapers, a job may require mowers, blowers, trimmers, a truck and possibly a trailer, to name a few. This is a problem because you’re likely to underbid on jobs where you use a lot of equipment and overbid on ‘simpler’ jobs that need less equipment to complete. So, you’re either not making enough money or not even winning the job – either way, you’re putting yourself and business at risk by relying on the DORS estimating system.
P.S. Momentum automatically captures and calculates your overhead costs for all vehicles, trailers and equipment. That means you’ll have all of the costs you need to consider at a glance. You can use this for precision bidding. Better bidding = more jobs + profitable jobs.