Utilization Rates are an important part of how firms track the hours spent on direct versus indirect labor, and are considered one of the 7 Key Financial Performance Indicators for architecture firms. I created this practice problem using the concept and real ways that it might change over time. Hyperfine is a great resource for practice questions and examples on both practice and project management concepts, as part of their Financial Formulas Workbook and their ARE 5.0 Courses.
Here’s a video of them going through a set of utilization rate questions.
Practice Question: Utilization Rates
The image below shows the salaries and utilization rates for the previous year for SKY Architects.
The salaries and utilization rates for this year are expected to be exactly the same, with the following changes:
- Baboucar will be on paid paternity leave for 3 months
- Yandeh will only be working part-time to pursue her graduate degree in historic presentation. Her utilization rate will be cut in half.
With these changes in mind, calculate the following:
- Estimated annual direct labor budget
- Yandeh R.’s estimated annual direct labor hours
In order to calculate the estimated annual budget we first need to calculate the direct labor budget for each member of staff:
- Samuel: $170,000 * 0.5 = $85,000
- Jeoffrey: $60,000 * 0 = $0
- Yandeh: $90,500 salary, utilization rate = 0.8 * 0.5 = 0.4, so Yandeh’s direct salary this year will be $90,500 * 0.4 = $36,200
- Fatou:$90,500 * 0.9 = $81,450
- Baboucar: $70,000 salary, but he will only be working for 9 months out of 12, so we calculate 9/12 of his salary or 75%. So $70,000 * 0.75 = $52,500. With a consistent utilization rate of 0.9, his direct salary is $52,500 * 0.9 = $47,250
If we add up all of these direct salaries, we get $249,900.
In order to calculate Yandeh’s estimated direct labor hours, we first need to determine hours per year. The number of hours in a year is 2080. Her current utilization rate is 80% but with her new graduate program, her utilization rate is reduced to 40% for this year.
So we would calculate 2080 hours * 0.4 = 832 direct labor hours this year.
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