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Calculating Burden Rate (Jon Balter Write Up)

Understanding Burden Rate:

Before we can really talk about burden rate, we have to understand what it is. 

The burden rate is the allocation rate at which indirect costs are applied to the direct costs of either labor or inventory. You should add burden to the direct cost of either labor or inventory when you want to present the total absorbed cost of these items. (http://www.accountingtools.com/questions-and-answers/what-is-a-burden-rate.html)

If you are still wondering what exactly burden rate is, let me make it simple.  Burden rate is the total cost for the employee divided by his productive hours.  So we need to break this down into two parts, employee true costs and productive hours. In the MFP and IT worlds there are two main thoughts on burden rate.  I will review both and tell you how to calculate your true burden rate.  Understand you can work out burden rate for your company or each employee. 

Why it is important?  All contract profitability (billable service too) must have a burden rate to be accurate.  If we want to know how much it costs to service a machine or a customer, we must first know how much it costs to have that technician there.  Contract profitability is the foundation to creating a great service department.

Option 1:

Travel time is a straight cost and will not have a burden rate.  So in this option, we will use all auto and mileage expenses as a general cost.  In this method, on the contract profitability, travel should always be zero because we are putting the cost for travel in the customer hours and not separating them.  The way that eAutomate does this is by assigning a cost to each hour (or part of an hour) at the customer site.  This is from arrival to departure in the service call.  This option will have zero cost for travel time due to the point these costs are factored into the customer repair time.  I find that using a full year of data normally gives the best resolution and eliminates abnormal behavior like vacations and training. 

So first we need to define and total costs.  Some costs are straightforward; like salary, employee taxes, health care, and other benefit costs.  Others are harder to come up with.  Some of these are overhead (building costs, admin, power, etc.).  Here is a short list of items to think about including:

1. Salary including employee payroll taxes, 401K match, healthcare employer contributions, and any other costs on the employee check that the company pays

2. Travel expenses- Mileage and auto expenses including tolls and parking

3. Overhead

     a. An easy way to do this is to add all the admin expenses together. So, all the      admin (use the Hanson Hey model) salary, benefit costs, building expenses          (power, water, rent, etc.), any other expenses, and software (eAutomate,            FMaudit, CEOJuice, etc.). Come up with a total. This should be large. Then            multiply it by 18%. This is the admin expenses associated with service. Then        divide by the number of Working Techs.

     b. The other way is to ignore the 18% distribution and come up with a solid          Service admin overhead. This is much harder.  We need three things: total          service admin salary costs, total additional expenses, and building overhead.

           1. Total service admin salary expense - First add together all salary and              benefit costs for all service admin staff, this includes dispatchers, service            managers, service directors, and parts clerks. Do not include warehouse              managers, drivers, shop technicians, or supply clerks, unless they have                joined responsibility, and then include only the percent of how much of                their time is service.  Remember that their costs are going to Sales. This              is your total service admin salary expense.

           2. Total Additional expense – This will include cleaning supplies, bonus                trips for service, training expenses, GPS systems, computers equipment              for service employees, and anything else you can directly relate to                      service.

           3. Building overhead - You will need the total cost for the building (rent,              power, water, upkeep, cleaning staff, etc.) and multiply by the percent of            space the service department and parts department take up. You can get              highly detailed and split the office space and warehouse space into two                pieces but in the long run it will make little difference.

          4. After we have total service admin salary costs, total additional                       expenses, and building overhead, add them all together and divide by the             number of technicians.

Ok so now we have a total cost for the employee.  Now we need to figure out the number of productive hours.  This is really easy with the CEO Juice Report “Technician productivity report” (ID34).  Run this for a full year and take the number of repair hours.  DONE.  This is so simple.  Make sure you exclude shop calls and office visits from this report. This is the amount of time over the year the technician really produces work.  Remember in this option, travel time is going to be a cost.  So by not including travel time in the total productive time we make it into a cost.  Here is an example.

Salary $18 per hour or $37,440 per year (2080 in a work year)

Indirect Compensations: $5,700 per (taxes, insurance, 401K etc.)

Travel is $5,520 per year

Total overheard is $378,780 and I have 16 techs so $23,673.75 per tech

That totals $72,333.75 (Can you believe I spent that on a $18 hour employee)

Annual Customer hours 1,280

So $72,333.75 / 1,280 = $56.51 per hour of burden rate.  So this is how a $18-hour employee has a burden rate of $56.51. 

Before I move on to option two.  Let me explain how important customer hours are.  Let us say the technician got an extra 3 hours a week or 156 hours per year in customer hours.  That would reduce the burden rate to $50.37.  To get that kind of reduction on the expense side I would need to reduce annual costs by $7,860.15 or reduce the employee salary by $3.78 per hour.  So to have the same financial impact I would have to take an $18 hour employee to $14.22 to get an extra .6 hours of work per day.

Setup Option one in eAutomate is easy. Open the employee record and add the Burden Rate:

Most companies do not want to have burden costs show up on the balance sheet (check with your CFO).  There is an easy way around this.  In your Billing account code set the Cost of Labor and Payroll expense offset to the same account:

If you use this option:  make sure to remove the check box in the options for 'Add Burden rate to travel cost' Options/Service calls:

If you don’t use this option then your contract profitable reports will show travel burden rate.  With this method travel is always zero. The travel cost per hour and per mile should both be zero too.

 

Option 2:

This is an option where we create two burden rates.  One for travel and one for customer hours.  This method is much more detailed for working out contract profitability.  There are three methods for coming up with travel burden.

Method 1:

Travel and customer burden will be the same.  This makes it easy.  We use the exact same calculations from option one but now add travel and customer hours together to come up with Customer hours.  So in the example above:

Total costs are still $72,333.75

But customer hours now include travel hours from the same CEO Juice report “Technician productivity report” ID34 so we will use the “total work + travel time” from the report which for this tech was 1649.

$72,333.75 / 1649 = $39.10

Now you may be getting all excited by this number being so low but remember this includes travel time.  So now both travel time and customer time have cost.  So if the technician drives 30 and works for 1 hour it is now 1.5 hours of cost. 

So,

Option one $56.51 X 1 hour = $56.51

Option two $39.10 X 1.5 hours = $58.65

I know, about the same result. The difference here is that customers with less travel time will have lower costs and customers with larger travel times will have greater costs. I find this to be the most useful method for contracts. 

Setup option two method 1 in eAutomate the same as option one:

If you use this option:  make sure to have the check box in the options for 'Add Burden rate to travel cost' Options/Service calls. DO NOT ADD the burden rate to the system options for hours in travel.  This will double it.  Setting the travel cost per hour sets a different travel cost than burden rate and will be reviewed in method 3. 

 

Method 2:

Travel is calculated per mile.  This works the same as option one but we remove all travel expenses.  Then we calculate the travel expenses to the mile.  This has to be done companywide in eAutomate because the mileage is only set at the company level.  In options, under service calls:

For this method we are going to put the burden rate in the employee record and the “per mile” in the options for the company.  Here is an example:

Salary $18 per hour or $37,440 per year (2080 in a work year)

Indirect Compensations: $5,700 per (taxes, insurance, 401K etc.)

Travel is $5,520 per year

Total overhead is $23,673.75 per tech

That totals $58,951.35

Annual Customer hours 1,649 (“total work + travel time”)

Burden rate of $35.75

Then you work out what your per mile expense is.

Travel is $5,520 per year / by 10,615 miles per year = $0.52 per mile.

eAutomate setup Option 2 Method 2:

Put Burden Rate in the Employee Record

Set the per mile in the options:

This is a great way to get down to even more detail.  This separates out travel miles from travel time.  The issue with this method is that it relies on mileage and time to be very accurate.  The service technician must enter odometers correctly and a mistake here could make your contract look really unprofitable. Use Juice alert ID219 to catch these.

 

Method 3:

This is a method to have a different burden rate for travel than customer time.  This method makes no sense because it is the same employee and the costs are the same.  I see no way to calculate a separate burden for the same employee. They have the labor rate, expenses, and costs.  

Enter the customer burden in the Employee Record:

Then enter your mileage and hourly burden in option. Make sure the add burden rate to travel cost is unchecked:

This example would work like this.

Technician drove 20 miles, 1 hour travel, and 2 hours at the customer:

20 miles X$0.52 = $10.4

1 hour travel x $20.50 = $20.50

2 hours burden rate x $35.75 = $71.50

Total is $102.40

 

Summary:

Option 1 is easy and comes up with one number for all time at the customer. The issue is that it voids any travel time so customers that have large travel times will look more profitable which is wrong.

Option 2 is superior because it factors in travel time and separates travel time and travel burden.  This way you can see how much you are spending on travel and customer time.  Either method 1 or 2 work great.  Method 2 will have more to monitor like miles entered and you need to make sure they are correct.  Either method works fine. 

Warning: Option 2 Method 3 – I have found no way to ever calculate different burden rates for the same employee. 

 

**Please note: changes to burden rates in eAuto will not effect reports/costs retroactively.

 

 

 

 

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