In the earlier blog, we spoke about three critical challenges faced to monitor Efficiency in Service Sector.
In this blog series, we will discuss the very first challenge – The Input Cost Measurement.
This challenge can be handled in a very simple but systematic manner as follows-
Identification of direct employees
All the employees right from the top to bottom who are directly engaged in rendering service to a client and spends how so ever little time on some assignment/ project of some client may be called “Direct employees”.
All the other employees will be called indirect employees. The employees generally engaged in office administration, accounting, marketing, sales, research, HR etc. would be called “Indirect employees”. If an employee is even partly engaged in rendering service to client he may be classified as “Direct employees”.
The input cost for each project would be the cost of time of these direct employees.
Indirect employee cost will be classified as indirect costs or overheads.
Cost determination of direct employees. (CTC Calculation)
First step would be to ascertain annual cost for each direct employee as follows:
| Components of Salary (p.m) | Rs. |
|---|---|
| Basic Salary Dearness Allowance House rent allowance Transport Allowance Leave Travel Allowance Medical Insurance & Reimbusrsements | 50000 5000 10000 2000 5000 2000 |
| Gross Salary cost | 74000 |
| Benefits | 5000 |
| Employer’s contribution to PF | |
| Total Cost p.m | 79000 |
| Total cost p.a | 948000 |
| Annual Benefits &Cost | |
| Bonuses Gratuity | 30000 25000 |
| CTC for the year | 1003000 |
Second step is to consider the actual time made available by the employees in a year / day as follows:
| Components | Days | Days |
|---|---|---|
| Total No. of days in a year | 365 | |
| Less: Deductions | ||
| Saturdays & Sundays in a year | 104 | |
| Bank Holidays in a year | 15 | |
| Annual Leave Entitlement | 30 | 149 |
| Total Available Number of days | 216 |
| Components | Hours | Hours |
|---|---|---|
| Office hours (10 to 6) | 8 | |
| Less: Deductions | ||
| Lunch time | 0.75 | |
| Tea/Coffee breaks | 0.25 | 1 |
| Total Available working hours in day | 7 |
Based on this, the third step would be to calculate CTC per day/ per hour as follows:
- CTC per DAY=CTC for the year/ Available days in a year.
=1003000/216
=4644
- CTC per hour=CTC per day/ Available hours in a day
=4644/7
=663
Preciseness in measurement of direct employees cost in terms of per hour allows quantitative control also which will be discussed later.
This avoids arbitrary allocation of overheads to the direct costs and offers a more effective control on costs of projects/ assignment.
EFF FACTOR advices this approach strongly.
Read on the next blog in the series, which discusses the second challenge: Measurement of Output and fixing it’s price.
