How should you allocate overhead costs?

Dave Pratt, CEO Emeritus of Ranch Management Consultants, recommends that you only allocate an overhead cost to an enterprise if you would lose that cost completely if you stopped that enterprise.

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[michaellowe]

Yeah it's much harder to determine if one section of a business is losing you money or not. I own a food business and it takes us quite a bit of investigation to really know if something should be cut.

[aspscatsystems]

Great Advice and scenario! Thanks Kept your reasoning Simple!!!

[synhetic]

Both options are giving you insites you need to make the correct business decisions so id argue you should do it both ways for a full picture, without doing it the first way you will never know that you could take your time, your truck and your rented hay ground and graze it for another 3k profit instead of a 2k loss incressing your business profit from 1k to 6k.

[K_Mill_Iron_Ranch]

Would you also want to move the salary paid to self to the cow side, or are we assuming we get the income from another source?

[entrepreneurlife]

Effectively, the hay was a value add by increasing the utilization of an asset.

[laurelgordon]

So, as an alternative to allocating costs evenly to both enterprises resulting in one earning a profit and the other not, would you rather charge more of the cost to the cows so that the hay is also profitable?