Driver Based Labour Budgeting – a Key Element of “What-if” Analysis!

labour budgeting using driversAs we’ve talked about now for the last couple of blogs, labour represents somewhere around 70% of the opex for most organisations. Recently we discussed labour budgeting by person and by role (with multiple people planned at once).

In this last post of the series, we will be discussing planning using drivers, rather than by either person or role (or a combination of both). This is a key element of doing what-if (or scenario) analysis as you link the output of labour planning (the costs) with key drivers of the business.

The third method is essentially mutually exclusive from the first two. This involves using ratios, or drivers, to calculate workforce costs. This usually means having an already calculated set of measures and metrics that you can then estimate labour costs in the future as a function of an already planned value.

What Driver Based Labour Budgeting

So what does driver based labour budgeting mean?  It means that when modelling the labour costs, you link the calculation of the costs to key drivers in the business.  For example:

  • You run a factory and produce 100,000 widgets per month.
  • Historically you’ve needed 1,000 man hours to produce those widgets.
  • Each man hour costs $30 in direct costs and $10 in indirect.

So in the future say you forecast production of 120,000 widgets. At the same level of efficiency as history, this will require 1,200 man hours and using the same costs as now, will cost $36,000 for direct labour and $12,000 for indirect.

The key measures are, of course,  the volume, the cost rates and efficiency. It is then at your discretion to manipulate those variables as appropriate. Once again, the values are then transferred to Opex to be part of your overall budget or forecast.

Pros and Cons of using Drivers for Labour Planning

The primary advantage of this method is that you have great ability to do scenario, or what if, analysis. So, for example, you test what the labour costs are for 150,000 widgets above, or for supporting 15,000 homeless people/nights per annum, or 300 inbound telephone calls into a call centre per day etc.

It is also perfect for very large, homogenous work forces. Is it right for everyone.  Well, no. However where labour is largely a variable cost and is not ‘lumpy’, then driver based planning is perfect. And it’s easier to model and maintain than mucking around and trying to plan for each individual person in a business.

Planning using drivers does, however, require an excellent understanding of those underlying drivers and the impact of change as to get it wrong can be very expensive!

A Key Part of What-if Analysis

What-if, or scenario analysis, allows a business to manipulate the key drivers of the organisation to see the impact of changes in those drivers right through a plan. If you had planned labour costs by person or by role, they would be disconnected from the drivers and thus render the scenario analysis very weak. Integrating drivers into your labour planning will then mean you can start to “pull the levers” of the business and test different scenarios.

If you’d like more information on which labour planning methods are right for your business, please contact Infocube on 1300 136 755 or via [email protected].

Finally, we have a two question survey re labour budgeting methods. Please take our two question survey here.

Our next blog post will start talking directly about what-if analysis and scenario planning.

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John Vaughan

John Vaughan is a highly experienced Accountant and Consultant. He has experience in the pharmaceutical, FMCG, distribution, professional services, manufacturing and financial service industries. With over 25 years of commercial experience and 20 years working with the Cognos products, he...

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