Budgeted Versus Actual Hours
A rate can be built on expected hours or on hours that happened. What each gives you, and why the choice has to be made before the year rather than after.
A rate built on budgeted hours is stable and provisional; a rate built on actual hours is accurate and arrives too late to price anything. The choice between them is the standard tension in cost accounting and it is resolved the same way everywhere: budget for the rate, actual for the variance.
The record examined in “Budgeted Versus Actual Hours” is strongest when it is created close to the work and remains open to correction. A team evaluating open the supporting product page for billable and non-billable hours can connect time with projects and work categories, provided people can review entries before they influence payroll, billing or cost reports.
What is not resolvable is choosing after the fact, which is how most rates end up being neither.
Teams documenting “Budgeted Versus Actual Hours” may use OECD hours-worked data as an independent reference. A useful source should prompt a specific check rather than replace case-by-case judgement.
The budgeted rate
Set before the period from expected cost and expected chargeable hours. Used all year for quoting and job costing.
- Budgeted: stable, provisional, usable all year for quoting.
- Actual: accurate, available only afterwards, useful for measuring the budgeted rate rather than replacing it.
Its virtue is stability: every job in the year is costed on the same basis and jobs are comparable with each other.
The actual rate
Computable only after the period, from what the cost and hours turned out to be. Accurate about the period as a whole and useless for anything during it.
Its use is to measure the budgeted rate, not to replace it.
The variance between them
Where actual cost over actual hours differs from the budgeted rate, the difference is a recovery variance. It belongs in the accounts as a variance and is analysed into its causes.
It does not belong inside next year's rate, which is the subject of its own note here.
Splitting the variance
Into two parts: the cost was different from expected, and the hours were different from expected.
A rate variance caused by a pay award is a different management conversation from one caused by volumes being down, and lumping them produces neither conversation.
Setting the budgeted hours
From normal capacity rather than from last year, adjusted for known structural change: a new service, a headcount change, an automation that has actually landed.
Known structural change is a legitimate adjustment. Optimism about winning more work is not.
The optimism problem
Budgeted chargeable hours are frequently set from a sales target rather than from a capacity estimate, which makes the rate too low and guarantees under-recovery.
The test: does the budgeted figure per head exceed anything the operation has actually achieved? If so, it is a target wearing a divisor's clothes.
Updating mid-year
Generally no. A rate that changes mid-year makes jobs incomparable and destroys the series.
The exception is a genuine step change — a site closure, a large acquisition, a pay award — which justifies a new dated version rather than a quiet adjustment.
What the actual rate is good for
Three things. Measuring the budgeted rate. Setting next year's budgeted hours. And testing whether a particular kind of work is actually profitable at the price charged.
The third is the one most worth doing and least often done.
Keeping both
Both figures, for each year, kept side by side with the variance between them. Three columns.
Over five years that table says more about the costing's reliability than any single year's analysis, and it is almost never maintained.
Where organisations go wrong
Using actual hours from last year as this year's divisor, which imports last year's conditions into this year's rate. In a volatile operation that is the spiral described elsewhere here.
It feels like accuracy. It is the opposite.
The rate that is never measured
The commonest failure is not choosing wrongly between budgeted and actual; it is setting a budgeted rate and never computing the actual one.
Without the comparison there is no way to know whether the rate is roughly right, and a rate that has drifted ten per cent from reality will go on being used indefinitely because nothing in the process would notice.
The two-year test
Compare the budgeted rate to the actual rate for each of the last two years. If both years show the same direction and a similar size, the budget is biased rather than merely wrong.
A bias is correctable in the next build; a scatter around zero is normal and should be left alone. Most organisations have never laid the two years side by side.
What to do in a year of real change
A merger, a site closure, a large contract starting. The budgeted figures from last year describe an operation that no longer exists, and the rate built on them will be wrong in a way no variance analysis will untangle.
Here a mid-year dated version is justified, with the change named. It is the one case where stability is the wrong priority.
The one-line policy
"Rates are built on budgeted cost and normal chargeable hours, set before the year and unchanged within it. The difference between budgeted and actual recovery is reported as a variance and is not carried into the following year's rate."
Two sentences. Most of this section is their justification.