Hourly time recovery
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PGM
Registered Posts: 1,954 Beyond epic contributor 🧙♂️
Having an ongoing "discussion" with our auditors.
We work out hourly rates by dividing total salary cost, by hours worked. This is total hours less holidays.
But they say we should use the same total salary cost, but divide it by total hours (inclusive of holiday hours).
This is purely from an accounts cost point of view, ie to gross profit. Not charge out rates.
But we cannot see the benefit of this?!
We work out hourly rates by dividing total salary cost, by hours worked. This is total hours less holidays.
But they say we should use the same total salary cost, but divide it by total hours (inclusive of holiday hours).
This is purely from an accounts cost point of view, ie to gross profit. Not charge out rates.
But we cannot see the benefit of this?!
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Comments
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Hi,
I think, if you pay for holidays like for normal working days, so you have to take holidays into account. If you have unpaid holidays, then yes - it doesn't go into total hours.0 -
I don't see the point. If someone is paid, say, 9 per hour, this equates to say 10 per hour, for each hour worked when including holiday. I would rather absorb the cost of holiday pay into hours actually worked, than look at the 'actual' hourly rate with holiday as a cost on top.0
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Hi,
I think, if you pay for holidays like for normal working days, so you have to take holidays into account. If you have unpaid holidays, then yes - it doesn't go into total hours.
Paid holidays.I don't see the point. If someone is paid, say, 9 per hour, this equates to say 10 per hour, for each hour worked when including holiday. I would rather absorb the cost of holiday pay into hours actually worked, than look at the 'actual' hourly rate with holiday as a cost on top.
Yep agree. The other way you'd always end up with unrecovered salary cost!0 -
Exacly. If I pay someone by the hour and their hourly rate is say £9, then the cost to me is,say, £11 per hour after employers ni and holiday. That's what I care about and indeed its necessary management information.Yep agree. The other way you'd always end up with unrecovered salary cost!0 -
Exacly. If I pay someone by the hour and their hourly rate is say £9, then the cost to me is,say, £11 per hour after employers ni and holiday. That's what I care about and indeed its necessary management information.
I really don't get the auditors argument.
They say the other way round you're charging holiday time to the project, when it should be overheads.
But in effect I treat holiday time as unpaid leave.0 -
I dunno, I don't do management stuff, and all of my wages, even direct wages, goes in overheads not direct costs. Maybe I should but bookkeeper wages in cost of sales and admin wages in overheads....
If you're looking at it as pure cost of sales, I would call hours worked direct costs, and holiday pay and employers NI as an overhead. So I guess in that case I agree with the auditors, on reflection.0 -
They say the other way round you're charging holiday time to the project, when it should be overheads.
But in effect I treat holiday time as unpaid leave.
I would charge it to direct labour as well, as it is unavoidable and part of hiring the people.
However, and sorry for the vague explanation below, but it might help. I just can't get my head around writing a logical explanation today!
Using a manufacturing company as example:
In most companies I've worked for, you build up your holiday over the hours worked, so it would be included in the cost of wages as a build up, in which case you wouldn't have to separate the holiday pay anymore, as it's calculated in the cost of wages already.
For example:
Say you pay someone £ 9 per hour, NI etc adds £ 2 and the holiday build up is worth another £ 0.50, than the cost of the direct labour would be £ 11.50 per hour, of which the employee gets 9, taxman gets 2 and the 0.5 is kept separately as a build up for holidays.
If you just write the build up to a separate account somewhere in the overheads department as holiday build up.
The direct labour cost would then be 11.50 per hour.
Once someone build up a full day of holiday, he can take the holiday, but instead of calculating it as a direct cost, you write it off from the separate account that you created in the overheads, so that the account is zero again.
Now looking at the factory. If someone takes a day holiday, in direct costs there is no difference, as it is written off from the overheads.
Usually the amount produced on that day doesn't change either, as it somehow got calculated in and staff levels are usually high enough to cover the holidays of others.
If you have ten employees working in the factory, the normal cost per day would be 10 times 8 hours times 11.50 per hour is 920.
If you wanted to calculate the cost per hour for that day and base it on the actual hours it would be 920 / 72 (9 employees at 8 hours) makes 12.78 per hour.
If you calculate the cost per hour for that day and base it on the hours that you normally work, it would be 920 / 80 (10 times 8) 11.5 per hour.
While actual the cost for that day wasn't more or less than any other day and the actual production level was the same, it gives a very distorted view on why the costs are all of a sudden so much higher just because someone went on holiday for one day.
I'm not sure if this helps, but it might be the way the auditors are thinking.0 -
For example:
Say you pay someone £ 9 per hour, NI etc adds £ 2 and the holiday build up is worth another £ 0.50, than the cost of the direct labour would be £ 11.50 per hour, of which the employee gets 9, taxman gets 2 and the 0.5 is kept separately as a build up for holidays.
If you just write the build up to a separate account somewhere in the overheads department as holiday build up.
That would work, and would give you a balance sheet code in credit or debit to charge holidays to.
What I do works the same, from the project point of view, it builds in the 0.5 or whatever into each hourly rate, but instead of putting the credit to a seperate account, its just charged as credit to wages paid. And when someone takes a holiday the timesheet goes in with a zero hourly rate.
Obviously the issue is over recovery of wages when people don't take holidays. On the other hand with 100 employees it tends to balance itself out and I don't believe its material, or worth the additional work needed to keep a control account which you just know will be a pain in the ass to keep track of.0 -
I'm with the auditors. Why would you allocate the cost of employees sunning themselves on a beach in Lanzarotte to direct costs? It's an overhead surely.0
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I dunno, I don't do management stuff, and all of my wages, even direct wages, goes in overheads not direct costs. Maybe I should but bookkeeper wages in cost of sales and admin wages in overheads....
If you're looking at it as pure cost of sales, I would call hours worked direct costs, and holiday pay and employers NI as an overhead. So I guess in that case I agree with the auditors, on reflection.
Thats ok for overheads.
But I don't like it for projects. Imagine from a manufacting point of view, you would not be building full staff costs into products made. And surely this is wrong?0 -
deanshepherd wrote: »I'm with the auditors. Why would you allocate the cost of employees sunning themselves on a beach in Lanzarotte to direct costs? It's an overhead surely.
Because I want 100% of staff cost, which we pay them to work on projects, not to go on holidays, to be charged on projects.
The auditors did then contradict themselves, by saying if someone worked 100% on one project, then it was ok to put 100% of their cost to that project.
But I want the way we treat holidays to at least be consistent.0 -
Thats ok for overheads.
But I don't like it for projects. Imagine from a manufacting point of view, you would not be building full staff costs into products made. And surely this is wrong?
Using that philosophy you would charge a proportion of all overheads to a project...we pay them to work on projects, not to go on holidays..
That's what 'paid holiday' is.
At the end of the day it is up to each company how to allocate costs to projects and either method would be acceptable providing you know that you have additional overheads to cover using the auditors method.
To coin an examiners phrase.. 'there are no right or wrong answers here'!0 -
And this is why I work in practice, not industry
HATE management accouts/costing!!0 -
Thanks everyone for your help, its good to get other points of view.0
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deanshepherd wrote: »That's what 'paid holiday' is.
That comment had me thinking, it does sum up the situation.
I'm seeing the 'paid holiday', paid by the project, with them being a direct cost.
And only 'overhead staff' going to overhead.
To me its more logical and straightforward than charging holiday time to overheads, than back to projects as a overhead allocation rate.0 -
I agree with everyone when talking about overheads and charge out rates, but I think your auditors are talking about financial accounts and the need under IFRS to account for and accrue properly employment benefits.
This particularly applies to holiday entitlement not taken at the end of the financial year and carried forward (or where holiday taken is ahead of entitlement). In these cases the value of holiday has to calculated and accrued as liability in the balance sheet (or an asset if ahead of entitlement). To enable this to be done the days/hours used in the calculation must include holidays.0 -
No, it was purely a discussion about the management accounts, which they advise on. Not the audit.0
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If allocating out the cost of an employee to a project or budget I would always do it on total cost ( basic pay + ni + superannuation) allocated on the % ( or hours ) of time spent in each area. Basically in ignoring holidays. Holiday "pay" is an unavoidable cost of employing that person so should be charged to a project or budget in the same way as ni or superannuation.
If recharging a person's pay costs to another organization I would divide total costs by weeks actually worked to get an hourly recharge rate.0 -
If allocating out the cost of an employee to a project or budget I would always do it on total cost ( basic pay + ni + superannuation) allocated on the % ( or hours ) of time spent in each area. Basically in ignoring holidays. Holiday "pay" is an unavoidable cost of employing that person so should be charged to a project or budget in the same way as ni or superannuation.
If recharging a person's pay costs to another organization I would divide total costs by weeks actually worked to get an hourly recharge rate.
Agreed, thats exactly what I've done. I just don't see the point in having a nominal code with a load of holidays costs sat in it. I think it shows a more accurate picture charging 100% of cost to workable hours.
I admit, a more accurate way would be to put the additonal £1 of the hourly rate to a holiday control account, which could then be netted off against holiday costs. But I can't think of an easy enough way to do it, considering any errors at any one time won't be material.0 -
. Holiday "pay" is an unavoidable cost of employing that person so should be charged to a project or budget in the same way as ni or superannuation.
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But so is providing them with a desk, chair and computer, and the office to put them in, and heating the office. Where do you draw a the line with unavoidable costs relating to an employee? Obviously desk, office etc doesn't come into it but I can see both sides to this one!0 -
But so is providing them with a desk, chair and computer, and the office to put them in, and heating the office. Where do you draw a the line with unavoidable costs relating to an employee? Obviously desk, office etc doesn't come into it but I can see both sides to this one!
Same principle? I'd charge the cost to a project, assuming there was a main one they worked on.
But I wouldn't charge a proportion of the desk to overheads for when they're on holiday
The way I look at it, is any additional cost that arises because of a project, will be charged to the project. ie additional bases, phones, staff, vehicles.0 -
Ah, but what if the desk is used part of the time by a 'project staffer' and part of the time by an admin? You can only go into so much accuracy with the apportionment.0
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deanshepherd wrote: »Ah, but what if the desk is used part of the time by a 'project staffer' and part of the time by an admin? You can only go into so much accuracy with the apportionment.
Very true, unless a project would use it for a considerable portion of its life its better going to overheads.0
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