Introduction: Decoding employee cost allocation
Employee cost allocation is the process of distributing staff costs across various aspects of a business. This helps in understanding how employees are used in different projects, allowing for accurate budgeting, enabling full costing for projects and better management control. Depending if you are a commercial or not-for-profit organisation it involves allocating payroll costs across different dimensions of analysis, such as accounts, funds, branches, activities, departments, and projects, hereafter called cost centres. This article explains the solution developed by Liberty Accounts for easy employee cost allocation, focusing on its relevance, methods, and advantages.
Planning and managing: Navigating the intricacies of cost allocation with Liberty Accounts software
How precise employee cost allocation can help with financial planning and control
Analysing employee cost allocation across various cost centres can be critical for different stakeholders, whether you are an accountant, a small business owner, or a charity treasurer. Here's how it might be beneficial for each role:
- Accountants: Ensures compliance with legal standards, facilitates cost control,
and supports profit analysis and decision-making.
For example let's consider a marketing agency that provides services to several clients across different sectors. Employees in this agency work on various projects simultaneously, and each project has its budget. Without a proper allocation of employee costs to specific projects, it's challenging to determine how much each project actually costs. If the agency implements a time-tracking system where employees log their hours worked on each project. An accountant, using this data, can then precisely allocate employee salaries, benefits, and overhead costs to individual projects.
- Small business owners: Guides strategic planning, budgeting, and performance measurement,
and aids in identifying areas for improvement or resource reallocation.
A small bakery owner with various revenue streams, including retail, catering, and online sales, recognises the need to understand labour costs across different business segments. Without proper employee cost allocation, the owner could misjudge the profitability of these areas. To address this, a system is introduced where employees log time spent on tasks like baking, packaging, and event preparation. This allows the owner to accurately allocate wages, benefits, and indirect costs, identifying profitable segments and avoiding focus on unprofitable ventures.
- Charity treasurer: Enhances transparency with donors, guides funding allocation, and helps monitor
and evaluate efficiency in alignment with organisational goals.
For example charities that provide specific services, such as teaching English to refugees, often rely on grant funding. These grants are generally designed to cover both the direct costs of the service and contribute to the charity's overall operational expenses. A critical aspect for the financial stability of these charities lies in understanding how to allocate general staff payroll costs between the specific project and the charity's day-to-day running. Proper allocation ensures that the funds are distributed effectively, maintaining the charity's solvency and allowing for the continued provision of essential services.
Employee cost allocation across multiple dimensions (cost centres)
- Accounts: Steering costs to distinct account categories, ensures compliance with legal requirements and offers financial transparency.
- Funds: Accurate analysis of employee costs to restricted funds is particularly important for churches, charities and other not-for-profits.
- Branches: Facilitates evaluation and strategic planning across various locations.
- Activities: Helps identify inefficiencies and control costs, crucial for aligning resources with goals.
- Departments: Enables profit analysis and performance measurement for effective management.
- Project: Guides strategic planning and resource allocation, with clear cost analysis fostering donor trust in not-for-profits.
Analysing employee cost allocation across these areas enhances strategic planning, ensures compliance, promotes transparency, and aids in performance measurement and cost control. It's vital for effective organisational management, whether in a business or non-profit setting.
Three levels of analysis: Unravelling the complexity
Liberty Accounts enables user-specified payroll allocation, allowing more in-depth analysis at three levels:
- Organisational Level: A macroscopic view of costs across the organisation, with the ability to split across multiple cost centres if required. Set on PAYE settings, the specified analysis will apply to all employees on all payroll runs unless amended otherwise.
- Employee Level: A microscopic examination of individual employee costs, set on employee details.
- Pay Element Level: A detailed insight set on Quick Pay/Deductions, analysis will apply for a particular employee for that particular payroll run. If there is a requirement to override for an individual pay element (e.g. overtime on a particular project) this can be done for a particular pay period.
Payroll journals are automatically generated based on your cost allocation. The comprehensive design of Liberty Accounts' employee cost allocation ensures that the entire process is streamlined, minimising human error and saving valuable time and effort.
Conclusion: A new paradigm in employee cost allocation
Liberty Accounts' innovative employee cost allocation operates on three integral levels: organisational, employee, and pay element, thereby offering as a significant advancement in payroll management for small businesses and not-for-profit organisations. By allowing detailed examination and distribution across different cost centres, this method simplifies an otherwise complex process. Through automation, it saves time and also notably reduces the potential for human error. Charities, churches, and other similar entities may find particular benefit in the precise analysis of restricted funds. This could indeed be a valuable tool for organisations striving to be more analytical and purpose-driven in their approach to managing staff costs and deployment.
