Tag: personnel cost

Personnel Costs in Cost Accounting

Include the non-wage personnel costs in the hourly presence rate of employees.This simplifies cost accounting.

Personnel costs in Cost Accounting

In this post we understand personnel costs as the costs for the work done by the employed persons . The costs of external persons who work for the organization are not included since the wages of these persons are accounted for and paid out in the performing organization.

Each person employed by an organization is assigned to a cost center, usually the cost center of the person’s boss. If employees perform work for projects, their personnel costs are incurred in the cost center of origin and, as far as measurable, are charged to the projects as internal services with corresponding hourly rates. Each employee is assigned to one and only one cost center. Should a person have two employment contracts in the same company, these are to be assigned to the respective cost centers.

Cost center managers are responsible for the  costs of their personnel . Therefore they want to know the monthly personnel costs of their management area in plan and actual.

Requirements for the personnel department, financial accounting and software

Payroll accounting is becoming increasingly complicated, since different types of non-wage labor costs have to be taken into account and since payments occur at different times, e.g. monthly salary, vacation pay, Christmas bonus, child allowances, gratuity, bonus. For each employee, the payroll must usually be created monthly in the payroll system for each wage type and wage deduction type. This detail is necessary that employees can understand what net amount is due to them and is to be paid out per payroll period.

The payroll accounting system must also be structured in such a way that the social insurance companies, the governmental control organizations and the auditors can understand whether all wage and wage deduction items have been calculated correctly. For the company’s own financial accounting, this system must prepare the expenditures for wages and salaries and deductions according to expense types so that they can be posted and checked on an accrual basis.

In most countries, employees receive a monthly pay slip. This shows the contractual gross wage earned in the period and which allowances for overtime and shift work have been accounted for and credited. If supplements for 13th month wages, vacation or Christmas bonuses have been agreed in the employment contract, these items are also listed in the wage statement for the month of payment.

Deductions to be borne by the employee are subtracted from the resulting wage total, e.g. employee contributions for social security and health or accident insurance, in various countries the wage taxes, contributions to pension insurance and similar. This results in the net wage to be paid out for the individual. The company must pass on these deductions to the relevant governmental organizations or insurance companies.

In cost center accounting, however, it is not the cash flows and settlements that are relevant, but the consumption of a reporting period.

Information requirements of cost center managers

Cost center managers are responsible for the costs incurred in their management area that can be directly influenced by them. Consequently, cost accounting must be designed that the personnel costs of a period can be compared with the work performed in the period.

For this purpose, it must be calculated in planning how much a certain person should cost per hour of presence according to the employment contract, if all wage components and the non-wage costs to be paid by the employer are included. Example:

Personnel Costs in Cost Accounting
Personnel Costs in Cost Accounting

In the example, it is assumed that the person, including the 13th month’s salary and possibly other fringe benefits, is to receive an annual salary of 58,620.90 and is to be present for 1,700 hours (212.5 working days of 8 hours each) in accordance with the annual work calendar. For the non-wage costs to be paid by the employer (i.e. unemployment insurance, pension plan, possibly health insurance), a surcharge rate of 16% on the gross wage sum was calculated. In total, this employee costs the company EUR 68,000 per year or EUR. That is 40.– EUR per planned hour of presence. This is the key information for the cost center manager: For each work/presence hour, this person costs the company EUR 40.

If this person works exactly the 1,700 hours during the year (line 7), the following personnel costs result according to the recording of the presence time  (line 8), for which the cost center manager is responsible:

Monthly presence time
Monthly presence time

In the example  the company is closed for company vacations during July. Since the employee does not have any presence hours in July, no personnel costs are debited for him, although he receives a salary payment. This is because the hours were worked in the other months (the total presence hours in line 7 is 1,700 hours). Even if the employee is paid the same wage every month, it makes sense for the cost center manager to see the personnel costs based on the really worked hours .

However, in payroll accounting and consequently in financial accounting, the payment values can be found. They differ from the costs:

Monthly Payments to Employee
Monthly Payments to Employee

In the payrolls, Monthly Payments to Employee 1/12 appears as the gross monthly wage, cf. line 1. Vacation and Christmas bonuses are also included in personnel costs but are paid in June and November. Payments of child allowances are not listed because they are reimbursed to the company by Social Security. Social security costs charged to the company are included in the 16% for non wage costs (line 4). They represent the amounts the company (not the employees) must pay for unemployment insurance, retirement benefits, and possibly health insurance (9,379.34).

The monthly personnel costs are calculated by multiplying the hourly presence rate (line 6) by the time worked. Thus the personnel cost for the work done in a period is charged to the cost center, not the amount from the pay slip (line 8). The data source for charging personnel costs to the cost centers are the amounts from cost center planning and the presence times, not the payrolls for the employees.

Necessary personnel cost-types in management accounting

In many companies it is sufficient to set up only one cost type “personnel costs” in management accounting. This is because in most cases, a person’s hourly presence rate includes all compensation, as shown in line 6. Cost center managers cannot influence the conditions for non wage labor costs because they are governed by regulations. Therefore, as shown in line 4, they can be included directly in the planned hourly rate. This facilitates planning and control for cost center managers.

Additional personnel cost types indicated by

    • Shift bonuses and/or bonuses for weekend work
    • Bad weather bonuses (construction industry)
    • Danger bonuses
    • Overtime bonuses and
    • Bonuses on achieved sales or contribution margins

are to be aligned. This is because these bonuses are planned and settled on the basis of hours actually worked or sales results achieved.

Proportional and Fixed Costs

The splitting of cost center costs into their activity-dependent proportional and their fixed portion is part of the annual cost center planning. This is done for each planned in the affected cost centers. Once the basic data is available, the process can be automated.

Proportional and Fixed Costs

Applying the cost cube from the previous post means that for decision support  all costs have to be split into their proportional and fixed portion, since proportional is the consequence of units produced and sold, fixed is the consequence of management decisions. The point is to correctly represent the principle of cause and effect in cost center planning. This splitting is done in the planning process.

    • An employee in a production center can work on production orders (setup, production, monitor quality, pack finished parts into transport containers). These are tasks that are causally necessary for the creation of a defined product. Without them, the product cannot be created. They are incurred proportionally to the quantity produced. The same employee can organize, take part in further training, attend meetings, clean up the workplace or, hopefully in rare cases, wait for work. The latter activities are determined by the organization of the cost center. They are incurred independently of the quantity produced and are therefore part of the cost center’s fixed costs.
    • The consumption of electrical energy in a production cost center is mainly determined by the type of product to be manufactured and the quantity produced. Electricity is also consumed for lighting, air conditioning, and the operation of auxiliary equipment such as computers. The consumption for production is causally necessary for the creation of the product and must therefore be planned proportionally. The rest of the electricity consumption is again the part of the capability to perform.
    • Maintenance work on the machines installed in the cost center can be caused by the operation of the equipment, e.g. after 200 hours of operation the rollers have to be replaced because they are no longer flat. Other maintenance work (technical inspections, functional checks) is due after a predetermined period of time, for example, annually, regardless of the quantities produced, to ensure operational readiness.

The examples show that different cost elements in a cost center must be planned with a proportional and a fixed portion. The following section shows how the necessary cost splitting can be largely automated. The example of the Stamping cost center is reused for this purpose.

Proportional and Fixed Costs
Proportional and Fixed Costs in 220 Stamping

In comparison to the initial situation in the post “Planning Cost Centers”, the columns proportional, fixed and value consumption per RFU have been added.

The procedure for automated cost splitting using the example of personnel costs: The annual budget for personnel costs is 337,560. This amount divided by the normal capacity of the employees (408,000 Pmin) results in the average presence time rate per minute of 0.82735. This is the average cost per minute “been there” of any employee in this cost center. The 0.82735 are multiplied by the planned activity level of 338,855 Pmin. The planned proportional personnel costs are thus 280,353. The fixed costs are the difference to the planned amount (57,207).

For the other cost types the cost center manager considers for each of these what portion of the planned amount depends on the cost center’s activity. In the example, these are the consumption of auxiliary and operating materials, external maintenance, other expense, and energy. The manager derives this proportional share from his planning documents (maintenance contracts, consumption tables for energy, material costs that only arise from productive work). By dividing the amount by the planned activity he receives the consumption per reference factor unit (RFU, entry in last column). Since the RFU in the stamping shop is the minute, this naturally results in very low rates. The calculation method is then analogous to the splitting of the personnel costs.

Tip for practical implementation: Do not use percentages when splitting the proportional from the fixed amount. Always use the proportional rate per RFU. If the planned activity level has to be adjusted due to a changed production plan, the proportional plan cost rate of the cost center would change when using percentages. This is unrealistic because it is still the same product with the same work plan.

Cost splitting is a prerequisite for the calculation of proportional planned product costs. In order to be able to process if-then questions, the manager must know which costs are directly caused by the product (proportional planned production costs) and which cost blocks are the result of structural and capacity decisions (fixed costs). The latter change as shown in the cost cube through management decisions while the proportional product costs per unit remain the same as long as the product unit has the same bill of materials and work plan.

If the planned activity level, the planned cost amounts per cost type and the consumption per RFU are known for each cost center, cost splitting can be completely automated. Proof of this is provided in the simulation model of the book Management Control with Integrated Planning – Models and Implementation for Sustainable Coordination.

Cost splitting is not necessary in structure cost centers since these areas work for the products and not on the products. Consequently, only fixed costs can be planned in these cost centers.