Determining appropriate overhead allocations

Question. We have an OB/Gyn group. The founding partner wishes to no longer be on call nor handle OB. In computing her share of the practice expenses, she will be charged a percentage of fixed overhead and a different percentage of variable overhead. There is a disagreement between the partners' CPAs as to what constitutes fixed overhead, especially as it relates to salaries. Do you have any information on this matter?

Answer. What constitutes “fixed” versus “variable” overhead in a compensation plan is
negotiated by the physicians who are party to the plan, within parameters that are more or less well accepted. Fixed expenses include:

Depreciation and equipment repair and maintenance charges

Interest expense or similar charges, like leasing

Legal accounting, retirement plan administration

Occupancy costs: rent, utilities, insurance, maintenance, cleaning

Salaries area different story - some practices rarely considered solely fixed overhead, although in surgical practices in particular they may be partially fixed and partially variable. For example, one common approach is to treat 50% of salaries as fixed and 50% as variable. Another approach is to identify positions and allocate them to fixed or variable. The office manager or practice administrator would typically be part of fixed overhead, while nursing or reception staff could be fixed or variable.

Admonition: When a physician cuts back on hours, if other physicians do not pick up those
hours, there may be less patient volume and therefore a need to cut back on staff salaries.

About the Author

Reed Tinsley CPA

This article is written by Reed Tinsley, a Houston, TX-based CPA with over 30 years of experience advising physicians and medical practices across Texas and the United States. Reed holds certifications as a Certified Valuation Analyst (CVA), Certified Healthcare Business Consultant (CHBC), and Certified Financial Planner (CFP), specializing exclusively in the healthcare sector. He is a published author, nationally recognized speaker, and trusted advisor to physicians on accounting & tax, practice management, and financial planning. Schedule a Free Consultation.