Elements and treatment of overhead

 

Overhead costs include a wide variety of items relating to the production process. Commerce Department cost questionnaires distinguish between items of 'variable overhead' and 'fixed overhead'. Variable overhead includes miscellaneous indirect materials, utility expenses, and other expenses that vary depending on the number of units of the merchandise produced. Fixed overhead may include factory rent, depreciation, property taxes, management salaries, certain departments (such as quality assurance or maintenance), and other expenses that do not change depending on the number of units produced.

 

Overhead is treated the same way as material costs and labour costs for purposes of cost of production and constructed value — the merchandise for which the cost is calculated is different, but the basic methodology is the same.

 

The major issue concerning overhead expenses is frequently the proper allocation of these expenses. Overhead expenses are usually incurred on a broad basis (for example, an entire factory) that may include more than the particular products that are under investigation. It is therefore necessary to devise some method of allocating the overhead costs to the particular products under investigation. Usually companies have some internal system of allocating overhead expenses to different product lines. Companies have used, and the Commerce Department has accepted, allocations based on the number of hours worked, the production quantity of the merchandise, number of machine hours, the floor area of the factory, and others. As long as the Commerce Department decides that this internal allocation is reasonable — it bears some rational relationship to the nature of the expense incurred — the Commerce Department accepts the company's normal allocation.

 

Special issues

 

For many companies, depreciation may be the single largest category of overhead expense. In such cases, the Commerce Department closely examines the depreciation expenses, to make sure both that they have been allocated correctly and that all appropriate depreciation expenses have been included.

 

Sometimes the Commerce Department does not agree with the accounting treatment for depreciation followed by the foreign company. For example, the Commerce Department insists that capital equipment be depreciated over the useful life of the asset. If the Commerce Department believes that the depreciation rate set forth in the foreign tax law does not accurately reflect the useful life of the asset, the Commerce Department might reject that allocation of depreciation.

 

Another example involves idle equipment. Foreign companies are sometimes able to 'stop' the depreciation on equipment that is idle and not in use. The Commerce Department has rejected this accounting practice, and added the depreciation on idle equipment back to the overhead expenses. The Commerce Department has argued that the idle capital assets are still a 'cost' to the company, and that the cost of production should therefore reflect that cost.

 

Research and development

 

Another important category of expense involves research and development (R&D) expenses. The treatment of R&D expenses in the company's accounting records is critical. If the records are detailed enough, the Commerce Department may request the company to undertake a product-specific allocation of R&D expenses.

 

Sometimes the company may want to undertake such an allocation, particularly to exclude R&D expenses for products that are not under investigation. If the company's normal accounting system does not classify R&D expenses by product, the Commerce Department is reluctant to allow the company to create such a classification to exclude expenses. The Commerce Department is far more likely to consider all of the R&D expenses to be general R&D and include them in general and administrative expenses.

 

 R&D expenses sometimes raise problems concerning amortization. If the R&D expenses are relatively low, the Commerce Department generally accepts the expenses as recorded on the company's books and does not investigate further. For high technology products with large R&D costs, however, the Commerce Department is more careful. The Commerce Department generally allocates R&D expenses prior to 'commercialization' (when the company begins to sell the product) over the expected life of the product. Since many high tech products have short lifespans — new products are constantly rendering old products outdated — the R&D expenses allocated to each year can be quite high. R&D expenses incurred after commercialization are treated as overhead expenses, and the company may expense those R&D costs in the year they are incurred.

 

Because of the significant effect on the overall cost of production in some cases, R&D expenses are often a major topic of dispute in anti-dumping cases. Foreign companies should therefore study these issues carefully and develop a conscious strategy for the treatment of R&D expenses.

 

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures