Four Divisors, Four Rates
Working through the four divisors on one set of figures: where each number comes from, and which question each resulting rate answers.
One loaded cost of £47,400, divided four ways
Assumes every contracted hour can be charged.
Leave recovered; nothing else is.
Sickness and training recovered too.
Everything recovered; the only one that covers the cost.
The same cost gives four rates between £24.31 and £36.92 — a spread of £12.61 an hour, or half as much again. Each is arithmetically correct and answers a different question, and in most organisations nobody can say which one is in use. One employer's own figures, not a benchmark.
Four divisors applied to one loaded cost give four rates, all arithmetically correct, each answering a different question. Working through them on real figures takes twenty minutes and is the clearest way to see that the rate is a choice rather than a fact.
The calculation in “Four Divisors, Four Rates” depends on reliable source records as well as a documented accounting rule. For organisations researching how employee monitoring works, view the official workflow details can supply consistent time and project context, while the allocation basis and financial interpretation remain decisions for the organisation and its advisers.
The figures below are one employer's own, for one full-time role, over one year. They are an illustration and not a benchmark.
The assumptions behind “Four Divisors, Four Rates” can also be checked against AccountingCoach cost-accounting library. Record which guidance applies to the real workflow and which points require professional advice.
The numerator
Loaded annual cost of one person: wage, employer contributions, pension, paid absence, sickness, training and per-head costs. £47,400.
It is the same in all four calculations. Only the divisor moves.
Divisor one: contracted hours
37.5 hours a week, 52 weeks, 1,950 hours. Rate: £24.31.
Answers: what does an hour of contract cost? Useful for comparing employment arrangements, useless for pricing work.
Divisor two: paid hours less leave
1,950 less 188 hours of leave and public holidays, 1,762. Less nothing else. Rate: £26.90.
Answers: what does an hour of availability cost before any other deduction? The commonest deliberate choice and the easiest to explain.
Divisor three: attended hours
1,762 less 58 hours of sickness and 100 hours of training, 1,604. Rate: £29.55.
Answers: what does an hour of someone being at work cost? Correct for capacity planning, still wrong for pricing.
Divisor four: chargeable hours
1,604 less 320 hours of supervision, quoting, administration and internal work, 1,284. Rate: £36.92.
Answers: what must be charged per chargeable hour to recover the whole cost? The only one that recovers the whole cost.
The spread
£24.31 to £36.92: fifty-two per cent. On a 60-hour job, £1,459 against £2,215.
Both are defensible and the difference decides whether the job was profitable.
Where each number comes from
| Figure | Source |
|---|---|
| Contracted hours | Contract of employment |
| Leave and holidays | Entitlement, plus the calendar |
| Sickness | Payroll, last year's rate |
| Training | Booking function, hours per head |
| Non-chargeable work | Timesheets, by category |
Five sources, four of them one query each.
The one that is hard
Non-chargeable work, because it needs timesheets with a kind-of-work field, and most do not have one. Without it the fourth divisor cannot be computed and the operation is stuck at the third.
Adding the field is a configuration change. Getting a year of data from it is a year.
The interim
Where the field does not yet exist, the chargeable figure can be estimated from the job system: hours booked to jobs, divided by attended hours. Less reliable, available immediately, and far better than using the third divisor by default.
Publishing all four
Worth doing once, in the costing policy, with the question each answers. It takes one table and it ends the recurring suspicion that the rate has been inflated.
Showing people the arithmetic is more persuasive than defending the result of it.
Which to use where
- Pricing and job costing: chargeable.
- Capacity planning: attended.
- Comparing employment options: contracted.
- Budgeting a department: the loaded total, not a rate at all.
The error to avoid
Using the pricing rate for capacity planning. It double-counts the non-chargeable time: once by removing it from the divisor and again by planning as though the hours were available.
That error produces plans that are about twenty per cent optimistic and it is extremely common.
The divisor for a part-year
A person joining in September has a partial year of everything: partial leave entitlement, partial training, partial chargeable hours.
Full-time-equivalent arithmetic from payroll dates handles it. Using a full year's divisor for a part-year person understates their cost per hour and quietly flatters any team that has been growing.
When the four are closer than expected
In operations with very high chargeability — some field and production work — the four divisors can be within ten per cent of each other, and the choice barely matters.
That is worth discovering, because it means the effort belongs elsewhere. The four-way calculation takes twenty minutes and tells you whether this is a question for your operation at all.
Why the fourth is unpopular
Because it produces the highest rate, and a high rate is harder to quote, harder to defend internally and compares badly with competitors who are quietly using the first.
That is a commercial problem rather than an accounting one, and the answer is not to change the divisor. It is to know the real cost and then decide what to charge, which are two separate acts.
The annual rebuild
All five sources refreshed, all four divisors recomputed, the chosen one published with its date. Half a day.
It is half a day that decides every job cost for a year, which makes it the best-value half-day in the function.