Time is money: employee time data and cost estimates
Many organizations require employees to keep track of time spent on various job-related tasks and activities. Such information can be used not only for compensation purposes but also to evaluate individual and divisional performance. In this accounting tutorial, we will look at an example of how employee time data can be used to assess capacity, the cost of idle capacity, and the cost of products or services.
1. How to use cost per minute to estimate organizational costs
The time and money relationship can be applied to estimating costs an organization incurs per minute (hour, day, week, etc.) of their employees’ labor. The concept of estimating costs per unit of time is used frequently in the activity-based costing. Let’s take a look at some examples of how such costs (i.e., per minute) can be determined and used by companies.
We will use a fictitious entity called ABC Corp. This company uses employee time data to assess performance of its various business units.
2. Cost estimation for a human resources (HR) department
The HR department employs 12 people. Each employee works on average 48 weeks per year, 5 days per week, and 8 hours per day. Employees usually take paid 1-hour lunch break during work days. The employees in the HR department usually spend about 20% of their work time on administrative tasks and training and 80% of time on performing various HR management tasks (e.g., interviewing, hiring).
The HR department’s costs include payroll costs of $960,580 and other costs (e.g., supplies, computers, utilities) of $60,250. The total cost is $1,020,830.
The practical capacity of the HR department can be determined as follows:
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12 people x 48 weeks per year x 5 days per week x (8 hours – 1 hour lunch break) hours per day x 60 minutes per hour x 80% productive time = 967,680 minutes (or 16,128 hours) |
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Cost per minute = $1,020,830 ÷ 967,680 minutes = $1.05 |
If the HR department spends 45 minutes to interview a candidate and additional 30 minutes to process the related documents and hire, the cost of hiring is $78.75 (75 minutes x $1.05). Likewise, if the department spends 65 minutes on involuntary separation processing, the cost of terminating an employee contract is $68.25 (65 minutes x $1.05).
If the HR department spends only 900,000 minutes on the productive tasks, the cost of idle capacity is $71,064 (67,680 minutes below practical capacity x $1.05 per minute).
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