Example PC&B Calculation - How to Do It and Present Your Results

Introduction

There are many ways to do payroll (or personnel compensation and benefits, PC&B) calculations, ranging from very simple ones to complicated ones.  The simplest way is to assume that the future payroll for the year of interest will be the same as the current year; in this case the accounting system results give the numbers for the future.   More complicated ways include adding up every individual's pay and benefits for the period of interest, project changes in positions, and account for many other potential changes.  Which types of calculations are made depend on the accuracy desired, information available, and time and resources available to make the calculations.   (An idea of the complexity that can be achieved is given by the different types of payroll costs illustrated by the example of these costs.  Click to see example of PC&B cost items.)

Paradoxically, very small and very large organizations can use simpler systems.   In the small organization there may be few variables and one person may know everything that is needed to make a very accurate computation.  In large organizations various factors tend to offset each other, and the computation may not be very complicated at all.  The organizations with a few hundred to a few thousand people on the payroll are the ones that have to put some effort into their payroll computations because their operations are complicated and they cannot rely on things canceling each other out.

The Example

Agency organizational components tend to fall in the smaller sizes, so the focus of this example is a small organization of about 230 people.  The assumption is that this organization has been in existence for some time so there is historical information on what the costs of staff are.   It is also assumed that the calculation is being made a few months before the start of the fiscal year in question.  Therefore, there is no need for detailed computations of various levels of pay and benefits since they are available from the accounting reports.  The calculation is for a full Federal fiscal year, i.e., October 1 through September 30.  Various known and assumed changes in the composition of the staff and their costs are illustrated in this example.  The estimated per FTE cost for the year, based on the accounting data assumed to be available, is $86,000.  The dollar amounts are in thousands.

Certain aspects of the calculation (or estimate) are explained.   These are highlighted; click on them to go to the explanation.  This table also includes more detail than would be appropriate for briefing management - it is more of a worksheet for the analyst than a tool for  communication with management.

*  Leave without pay.  When people are on LWOP costs are reduced, usually by the full extent of their salary for the time they are on leave.

Selected Explanations

Base, for starting year:  Developing this base amount requires analysis and judgment.  The calculation is usually for a fiscal year that is to start in the future, so there is no actual accounting information for the first pay period of the fiscal year in question.  The way to proceed is to use the most up to date accounting information on the payroll costs that is representative of the makeup and pay of the workforce as it is likely to prevail in the year for which the calculation is being made.  It is unlikely that a perfect fit will be found from the accounting system, so analytical adjustments will have to be made by the budget analyst.

These adjustments should focus on the costs captured by the accounting system that are not routinely recurring, such as a one-time large expenditure for cash awards.  The point is to derive a reasonably accurate value for the payroll costs that is not going to change except for reasons that can be incorporated into the calculation as adjustments.  The items identified in the example as adjustments would be the types of costs that should be examined in the accounting reports to possible adjustment to derive the base amount.

The benefit of using recent accounting information as the starting point is that actions related to payroll that took place prior to the report's effective date, such as pay raises and promotions, are already integrated into the costs reported by the accounting system and there is no need to make special efforts to research facts of this nature.  The analytical effort should be focused on what the future changes may be.

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Effective date of the transactions in the accounting reports needs to be ascertained.   There are lags in all reporting systems, including cost accounting systems, and the date at which certain transactions are recorded may be far from the date at which they took place.  For example, a pay raise for a payroll system that is based on monthly payments may take two to three months to be reflected in an accounting report, so the time at which this cost is reflected in the reports must be known by the analyst so appropriate adjustments can be made to the data.  In most Federal agencies, the effects of the annual January pay raise can be safely assumed to be reflected in accounting reports for mid-February and later.

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FTE are full time equivalents, not people.  FTE are the same as workyears.   The analyst must keep this distinction clearly in mind as she proceeds with a payroll computation.  People working use FTE.  A person working full time for a full year will use one FTE for the fiscal year, but a person working full time for three months of the fiscal year will only use 0.25 FTE in the year.  It is true that full time permanent employees can be assumed to cost one full FTE, and they will do so if they were employed in the past and are expected to be employed for the indefinite future, but this is not true for full time employees newly hired, or those expected to leave before the end of the fiscal year.  And an employee who may have used 0.25 FTE in the current year may well use a full FTE next year.  Some organizations have headcount or FTE limits, so keeping track of numbers of people may be necessary as well as budgeting for FTE.  Even if there is no need to account for FTE, FTE are more convenient to use to calculate payroll costs than to do it directly using dollars.  FTE can be used to calculate paid hours of people on the payroll and then translate the FTE value into dollar costs.

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Detail.   The amount of detail used in a calculation requires that the analyst exercise sound judgment.  It is always useful to spell out all details that affect the outcome of an analysis, or that may make a difference that matters if the facts were to change.   Spelling out the detail can be done either in footnotes, in separate analyses in other spreadsheets or databases, or simple computations documented in comments or notes.   It is not advisable to incorporate data and assumptions into the formulas in a spreadsheet; although formulas need to provide for the proper calculations using the assumptions made, the actual assumptions and the data should be clearly visible without having to inspect the formulas.  This, of course, can lead to much detail, and for this reason sound judgment needs to be exercised as to what is important and what is not.  For some analyses a large number of variables that have little effect on the outcome can be aggregated into one category, with the details relegated to a footnote.   Supporting analyses can also be prepared as separate analyses that stand on their own.

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Communication with management is an essential part of making a proper PC&B calculation, both before the analysis and to present the results.  Certain assumptions for the calculation can only be obtained by discussing them with management; examples include plans for reorganization and staff changes as well as bonus and cash award policies.   The purpose of the analysis is to inform management, so the results must be presented in ways that are readily understood without leading to confusion.  The presentation should also lead to addressing the matters on which management has to make decisions, such as increasing or decreasing recruitment efforts.  A good rule of thumb for communicating with management on PC&B matters is that it take no more than ten rows in a spreadsheet to lay out the numbers.  If it takes more, the analyst should take a close look at what is to be conveyed to management.  The summary for management for the example should look like this:

Our Organization's FTE and PC&B Use for FY 2000

(Dollars in thousands)

This example of a summary for communicating with management is quite different from the example calculation.  The point here is that the analyst must make detailed computations to know what the numbers will be, but communication is not the same as computation.  (You should also read the communication page in relation to this part of the payroll computations.)  Note the points being made in this summary:

The smart analyst briefs her management using this summary.  Of course, she also has the detailed calculations handy in case anyone challenges her simplicity and efficiency.  Nothing more pleasurable than being asked to overwhelm your management with numbers when you tried to spare them in the first place!   Eventually they will learn to trust your judgment.  But make sure that you do have the numbers right all the time.