Challenge 1. Input cost measurement

Challenge 1. Input cost measurement

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
Gross Salary cost74000
Employer’s contribution to PF
Total Cost p.m79000
Total cost p.a948000
Annual Benefits &Cost
CTC for the year1003000

Second step is to consider the actual time made available by the employees in a year / day as follows:

Available days in a Year
Total No. of days in a year365
Less: Deductions
Saturdays & Sundays in a year104
Bank Holidays in a year15
Annual Leave Entitlement30149
Total Available Number of days216


Available hours in a day
Office hours (10 to 6)8
Less: Deductions
Lunch time0.75
Tea/Coffee breaks0.251
Total Available working hours in day7

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.



  • CTC per hour=CTC per day/ Available hours in a day



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.

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