Audit and Accounting

What is the best way to distribute internal costs per Partner/Associate?

17.04.2019 at 15:13 h / Edited 08.07.2019 at 01:30 h
Solved

Kate Head of Innovation

4

Hello All, 

The current model, implemented by the company I work for, to calculate internal costs per resource is not working efficiently.

Until now we were using the averages per role ( for example, average internal cost per Partner, per Associate, per Analyst) and this is how the costs were distributed.

However, what we charge the clients is unique per individual - any two Partners /Associates etc. charge differently when on the client side.

What is the best way to build a model that actively takes into account the activities and hours spent, together with the overall contribution to the pot in the company? 

1. Do you consider Activity-based costing as a solution? Or

2. Do you think there should be a proportion-wise way- your internal costs depend on how much you charge a client? However, there are fixed costs that should be equally distributed to all resources.

On the other side, if implementing a live track of total days worked, the management doesn’t want to drive the culture of - ‘take no holiday days ‘ as this will increase your internal cost for the company ( income brought/ hours worked).

Many thanks for the suggestions, 

K.

 

 

 

Answers

Answer the challenge

Michael Company Rep

3

Depends on whether or not you want to reward effort or plain revenue?

If you want to evaluate revenue - your second point makes more sense, because you can look at both total and hourly amount. 

If you want to evaluate effort and ability to deal with complex tasks - point 1. 

Also in what sense does the current model not work?

Kate

1

Hi Michael, thanks for the questions. The current model is taking an average for the internal costs. However, same positions vary in a wide range of charge out rates, while the internal costs are based on average. Thus, the resources with a lower charge out rate experience a lower profitability once costs are deducted.

Michael

1

Hmm I see, the thing is, they are actually less profitable, no matter how you look at it. If you want a slightly different evaluation, maybe you can make a calculation adjusting for hours Say the standard/average is 50 billed hours per week. if someone has billed 30 hours, take what he made and multiply it by 60%, so even though he might've billed a lot, he made less money. Someone who has small hourly rates, but billed say 70 hours, can have the amount he brought in multiplied by 1,4 in order to "reward" him for the extra effort. It's all quite subjective though, you can also flat out compare billed hours, or create a system where certain more difficult activities count for different amounts.

Solution

Arpit

2

You can calculate the total cost for the firm. This will allow you to take into account the fixed costs (rent, utilities etc.) and salaries of employees (which is fixed for both professionals and other departments such as HR, Finance, Marketing).

Calculate the profit or loss based on the total revenue. The profit should be provided to the firm's partners. This will be based on their performance (number of deals or another metric that the firm think is important for their growth).

Or the partners can decide how they want to use profit.

For your reference, I am attaching two links that will help you create a cost model for the firm.

  1. Capacity
  2. Cost

In my opinion, the reason for not using internal cost per employee is that every employee will have different goals and motivation for the jobs. This cannot be measured by one metric of P&L.

Marieta

0

Hi Arpit, that is a really good approach and will look at the videos. I might try to implement it.

Kate

0

Hi Arpit, I will deep-dive into your suggestion and see how that might work/be accepted in my organisation. Will keep you posted.

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