In the utilization calculation, what is the denominator used to compute utilization rate?

In the utilization calculation, what is the denominator used to compute utilization rate?

• A. Direct salary only
• B. Total salary
• C. Billable hours
• D. Overhead costs

Answer: (B)

Utilization rate shows how much of the firm’s labor resources are being used for billable client work. To express this as a ratio, you need a denominator that represents all the labor resources available—the total salary paid to the personnel involved. That way, the numerator (the portion of compensation tied to billable work) can be meaningfully compared to the whole. Using overhead costs would distort the rate, and using billable hours as a denominator would mix units. Therefore, the denominator used is total salary.

Utilization rate shows how much of the firm’s labor resources are being used for billable client work. To express this as a ratio, you need a denominator that represents all the labor resources available—the total salary paid to the personnel involved. That way, the numerator (the portion of compensation tied to billable work) can be meaningfully compared to the whole. Using overhead costs would distort the rate, and using billable hours as a denominator would mix units. Therefore, the denominator used is total salary.