Allocation of Overhead Costs in Journal Programs
SANDRA WHISLER, UNIVERSITY OF CALIFORNIA PRESS
In any press that publishes more than one journal, the problem of how to assign overhead costs arises. While many of the costs of publishing can be directly attributed to a particular journal (especially production and postage costs), many others cannot. Treating issues of a journal as a series of books and applying the standard formula for allocating books overheads would often have the effect of inflating the overhead calculation and thus the ultimate price of the journal. Instead, an overhead allocation formula should be devised that fairly spreads the overhead costs over the journals published. Because journals exist over time and be cause outside parties (journals editors, sponsoring society officers, and sometimes university officials) often have a vital stake in the economics of journals, it is important to devise a workable formula that is justifiable, that is based on objective, quantifiable measures, that does not change often, and that can be applied evenly to all journals.
Overhead Costs Included in Overhead Calculations
Costs included in the overhead allocation typically include salaries and benefits for journals personnel; operating costs (such as phone, postage, and overnight mail charges) that can be easily traced to the journals program but not to a particular title; supplies and equipment purchased directly by journals staff; travel and entertainment; and salaries and benefits for press staff outside the journals program who work on journals (for example, warehouse and business office personnel). If such employees work exclusively with journals, their salaries might be charged directly to the journals program's budget. If they work on both books and journals, the journals program might be charged a portion of their salaries.
In addition, the journals program typically carries a portion of the general press overhead. This can include a share of general managerial salaries; rent, utilities, and other plant costs if appropriate; a share of mailroom and warehousing costs that cannot be directly measured and allocated; a share of unallocated supplies expenditures (it may, for example, be more economical to order supplies centrally and charge them according to a standard formula); and a share of the overhead charges that are assessed to a press by its university.
Whenever possible, all general press overhead charges assessed to the journals program (and to other departments of the press) should be allocated according to quantifiable measures of actual costs. Personnel management costs, for example, could be spread according to number of personnel. Accounting costs, if accounting functions are not handled within the program and if no accounting personnel are assigned exclusively to journals, could be spread according to gross revenues or according to an estimate of the actual staff time spent on journals matters. (See the section of this handbook on financial arrangements between books and journals for more details.)
Formulas for assessing general press overhead should be reviewed regularly (every two or three years for a complex operation) to make sure that the formulas accurately measure the costs involved. This review is typically a joint effort of the journals manager and the chief financial officer.
Assessing Individual Journals for Overhead Charges
Prudent management of the journals program and of the individual titles published requires a system for assigning a valid share of the overhead expenditures for the total journals operation to each title. This share should be assessed to both press-owned and contract journals, even though a sponsoring association may not be charged directly for its journal's overhead costs (since contract terms will often specify that overhead costs are to be covered by a publishing management fee based on some factor other than actual costs). There may be overhead costs that are not assessed to particular titles (research and development costs for new technology might be one example), but, in general, one should be very cautious about accumulating nonassessed costs.
Because each sponsor and/or editor typically receives an annual financial report - and because, for some journals, the overhead costs will make the difference between breaking even and operating at a loss - overhead allocations to particular journals are scrutinized skeptically by editors, society officers, and other nonfinancial personnel connected with the journal. As a result, it is important that the overhead formula consist of quantifiable and justifiable measures of staff time in the various areas, that it be consistently applied to all journals, and that it be applied consistently over time. Changes in the calculation should be undertaken with care, since such changes may have a substantial effect on the financial picture of particular journals, which is likely to cause complaints from those journals whose allocated charges increase with the change of formulas.
Devising and applying an overhead allocation formula is always a balancing act between accuracy on the one hand and practicality on the other. Since personnel costs are the major allocatable expense, any formula will most importantly spread personnel costs in a way that reflects accurately the staff time expended in various activities for each journal. While a time log kept by each employee would, in theory, provide the most detailed measure of staff time, it is time-consuming and not always accurate. The conditions or the publishing profile at a particular press may require different criteria for measuring staff time in a particular area. The important thing is to devise a standard that is objective, measurable, and consistent without spending all one's time on overhead allocations.
One Overhead Allocation Model
One way to allocate expenses is to establish quantifiable criteria for calculating the proportion of costs for each publication in specific functional areas of the journals publishing operation. In a simplified example, if production overhead were spread according to number of pages published annually, then a journal that published 1,000 pages out of a departmental total of 20,000 pages would be allocated 5% of production overhead, because it published 5% of the total pages processed by the department.
The model proposed below allocates cost on the basis of several different measures. Since personnel costs are usually the major cost to be allocated, the preferred basis for allocation is a straight measure of the staff time spent on each publication. But it is not always practical for staff to track their hours. In those cases, other measures must be used that correlate well with staff time expended.
Sometimes overhead costs must be allocated on the basis of the percentage of direct costs, for lack of a better measure. This principle of allocation has built-in distortions, since staff time does not necessarily vary proportionately with direct expenditures (beautiful paper and high-resolution illustrations do not necessarily increase staff time in proportion to the degree to which they increase direct production costs, for example). Such distortions may require managerial discretion and adjustments. Here is a possible set of measures by functional area:
Production. Production staff costs and unallocated production expenses might be spread by a combination of number of pages published and number of issues per year (since four 100-page issues take more staff time than one 400-page issue).
Subscription Fulfillment. Fulfillment staff costs, subscription fulfillment computer costs, computer supplies, and any renewal-notice printing and mailing costs that cannot be allocated directly to one journal could be spread using one of the fulfillment formulas described below. The simplest fulfillment formula is to add up all the costs, divide by the total number of subscribers, and establish a cost per subscriber. Then charge each journal this cost per subscriber times the number of subscribers. A more complex but more accurate formula that is often used includes total number of subscribers, number of foreign subscribers (overseas subscribers take more staff time because overseas subscriptions generate more claims, due to the undependability of international mails), number of individual subscribers (individual subscribers use more staff time because they renew more erratically and move more often), and number of issues (each issue release adds staff time). In this model, one computes the individual journal's share in each of these fields and then combines all the shares into a total share for fulfillment costs.
Manuscript Editing. Here direct time allocations work well. It is feasible to ask manuscript editors to keep a time log and then charge each journal its share of total editing hours annually. Alternatively, one might charge by total number of pages, though this does not allow for such variables as difficulty of the material and editorial office skill in manuscript preparation.
Marketing. A smaller press may choose to subsume marketing allocations under general administrative cost allocations. If marketing is a major part of services provided, as it typically is at larger presses, allocation will be necessary. Direct time allocations do not work well here, since marketing staff typically work on many projects at once, making it difficult to track time accurately for any particular project. It is simplest to base the allocation on share of total direct marketing costs. But direct costs don't always directly reflect staff time expended on the project. For example, reprinting a fancy four-color promotion piece for remailing to 100,000 more prospects may take less time than creating a cheap new brochure and mailing plan from scratch, even though the direct costs will be much higher. The person in charge of journals marketing should therefore review the proportions derived from direct expenditures to make equity adjustments before applying this formula to marketing overhead costs.
General Journals Management. All costs of journals administration belong here, along with the journals program's share of general press overhead. Share of total gross income is a common measure here, though it should be realized that it weighs the formula against those journals that generate major revenues. This will be most obvious if a program includes a mix of scientific and nonscientific journals or of very large and very small journals. Adjustments may be desirable.
Unallocated Expenses. Costs not covered by any of the above criteria could be handled in a variety of ways. They could be allocated among journals by a percentage of gross revenues or of gross direct expenses. Or they could be spread equally among all the titles, if they were fairly small. Alternatively, they could be spread by an average of the shares of all of the formulas used in the rest of the allocation. So supplies and expenditures, travel and entertainment, and press overhead would all be spread according to a formula combining number of pages, number of issues, number of subscribers, number of foreign and individual subscribers, the marketing formula, the manuscript editing formula, and gross income.
Designing an overhead allocation formula is a lot of work. But its application, once developed, can be handled routinely. A journals manager will wish to review the formula as part of the annual financial review. Changes in application of an existing formula should be undertaken with care, since major changes will make year-to-year comparisons more difficult and because editors and society officers will be deeply - and vocally - concerned about increased overhead allocations resulting from changes in the formula. Rapidly growing journals programs, however, may find that they must modify the overhead formula more frequently than more stable programs in order to reflect major additions of staff to accommodate the rapidly expanding list of journals. It is always possible to justify a formula based on objective and appropriate criteria, consistently applied.