How is utilization rate defined?

How is utilization rate defined?

• A. Direct Salary Expense / Base Salary
• B. Hours billed to client / total hours
• C. Overhead rate
• D. Profit margin

Answer: (A)

Utilization rate expresses how much of payroll effort is being dedicated to client work, shown as a percentage of salary cost. It is defined as Direct Salary Expense divided by Base Salary. - Direct Salary Expense represents the portion of salaries spent on work that goes directly to client projects (the billable portion). - Base Salary is the total salary cost for the positions involved, before allocating to overhead or non-billable activities. For example, if the base salary for a team is $100,000 and the portion of that salary spent on direct billable work is $80,000, the utilization rate is 80%. This metric helps indicate how effectively payroll resources are being used for revenue-generating work and informs staffing and pricing decisions. While another common measure looks at hours billed to clients divided by total hours worked, this question follows the cost-based approach, focusing on the share of salary tied to billable effort rather than just time.

Utilization rate expresses how much of payroll effort is being dedicated to client work, shown as a percentage of salary cost. It is defined as Direct Salary Expense divided by Base Salary.

• Direct Salary Expense represents the portion of salaries spent on work that goes directly to client projects (the billable portion).

• Base Salary is the total salary cost for the positions involved, before allocating to overhead or non-billable activities.

For example, if the base salary for a team is $100,000 and the portion of that salary spent on direct billable work is $80,000, the utilization rate is 80%. This metric helps indicate how effectively payroll resources are being used for revenue-generating work and informs staffing and pricing decisions.

While another common measure looks at hours billed to clients divided by total hours worked, this question follows the cost-based approach, focusing on the share of salary tied to billable effort rather than just time.