Managing budgeted payroll costs by determining your accounts “average hourly wage rate”. Understanding the process
Managing payroll expenses is not an easy task in today’s ever changing environment. This is the season where we typically have more than usual staff changes due to school and first time part time workers in our communities.
For the most part, many of our community budgets have been created more than 12 months ago and we used an pre-determined “average hourly rate” to help manage the budget payroll expense process. As part of the process we hypothetically determined an increase to the “average hourly wage rate” and which month it would take effect to help us accurately depict payroll expenses throughout the budget year. I believe it is helpful for each of us to best understand the “how to” process of determining average hourly rates and the effect they have on your budget tied to financial performance.
Data and Facts
· You manage a medium size CCRC that is budgeted to run with an FTE level of 22. An FTE is an acronym for “Full Time Equivalent”.
· 1 FTE equals 2080 annual productive hours (40 hours x 52 weeks)
· 22 FTE’s totals 45760 annual productive hours (2080 x 22 FTE’s)
· Budgeted average hourly wage rate is $10.62 (pre-determined by prior 9 month history of actual performance)
· Annual budgeted payroll expense is $485971.20 (Sum total of average hourly wage rate x annual productive hours)
· Weekly budgeted payroll expense is $9345.60 (Sum total of annual payroll expense divided by 52 weeks)
· Weekly budgeted hours are 880 (this is the sum of the annul hours divided by 52 weeks in the year)
To determine your budgeted “average hourly wage rate” you divide payroll expense by annual hours. In this case it would be $485971.20/45760. This equals $10.62.
Scenario for Exercise
Calculate your actual “average hourly wage rate” for your current years financial performance
Current years financial performance has calculated the actual average hourly wage rate to be $10.69. To calculate this you would need to take your past 9 months of actual hourly payroll expense divided by your actual hours worked in the same 9 month period. We suggest using 9 months of actual as you will need to have your budget data prepared before the next year’s budget start date.
Your community may have many different wage rates based on positon, tenure with the company etc. This could have little relevance as you will use only actual data and hours worked to calculate your “average hourly wage rate”.
Calculations
9 months of actual payroll expenses total $377800.00
9 months of actual hours worked equals 35320 hours
Average hourly rate would calculate to $10.69.
This exercise shows that you how to determine your average hourly wage rate. Additionally, this calculation shows that the financial performance has been running higher than budget on payroll expenses due to the increase in the average hourly wage rate calculation of $10.69 vs. $10.62.
The variance to your budget equals the difference in wage rates times the actual hours worked. ($.07 cents per hour x 35320 = $2472.40).
This is extremely important to remember to complete this process to develop an accurate budget for the next year.
Kevin J Mclaughlin | Regional Director of Operations