Burden Rate – Definition

Cite this article as:"Burden Rate – Definition," in The Business Professor, updated April 28, 2019, last accessed July 13, 2020, https://thebusinessprofessor.com/lesson/burden-rate-definition/.

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Burden Rate (Costs) Definition

Indirect costs related to employees beyond gross compensation or payroll costs is the burden rate. The labor burden is the dollar amount for every dollar of wages. For instance, a burden rate of $1.00 means that you are spending $1.00 on every dollar paid in gross wages on the costs of indirect labor. The burden rate includes typical costs such as health insurance, paid leave, travel and training expenses, vacation, sicke leave, workers compensation, and payroll tax. The burden rate provides a more accurate view of the labor total costs than just viewing payroll costs by themselves.

A Little More on What is the Burden Rate

Much of the time, the costs of the burden rate are hidden. There are times when overall cost of labor is as much as 50% more than just the payroll costs by themselves. To gain an accurate view of the profitability the burden rate must accurately be calculated. Only the employee’s costs that are above and beyond compensation or salary make up the burden rate. These are the hidden costs of maintaining an employee. Additional benefits, paid leave, and legally mandated insurance are additional liabilities included in the burden rate.

The state the business operates in and the federal government require burden rate expenses such as payroll taxes, Medicare, Social Security, unemployment, and workers compensation. Other mandatory expenses such as offerings of health care may be required to be offered to every employee if a business is over a specific size. The location of the business may incur additional job training or local payroll taxes also.

The required burden costs are calculated to make a determination of where certain businesses will operate. Locations can become more or less attractive as costs vary significantly from one state to another. Burden costs may include other benefits offered to employees such as flexible spending accounts, retirement benefits, dental care, prescription drug care, vision care, and base health care offerings that are not required for the company to provide to a particular employee. Burden of cost calculations must also include cellphones or vehicles used for business by employees. Other services that must also be included in the calculations include wellness activities, beverage or food offers, business lodging for trips, training costs, and uniforms that are required.

References for Burden Rate

Academic Research on Burden Rate

Strategic management accounting-why and how, Kawada, M., & Johnson, D. F. (1993). Strategic Finance, 75(2), 32. Strategic decision blends non-accounting data with management accounting data to create the discipline of Strategic Management Accounting (SMA) for companies. This paper’s purpose is to reveal whether or not certain business strategies influence the SMA. Many authors believe that SMA bridges the gap over MA. SMA provides a broader focus of a business’s financial information.

Recent and future trends in cost estimation, Layer, A., Brinke, E. T., Houten, F. V., Kals, H., & Haasis, S. (2002). International Journal of Computer Integrated Manufacturing, 15(6), 499-510. Innovative approaches to the creation of products are driven by smaller times to the market and competition. Cost is crucial to the functionality and quality to the success of a product in today’s market. In the field of cost estimation, this paper outlines current state of the art and future trends. In the field of cost accounting, a short review of the relevant terms is given first. The cost calculation model and the product development impact on costs is summarized. In order to reduce the wide number of approaches to a single basic structure a methodological approach in the product development process is set apart and in scientific context classified. The shortcomings of the cost estimation are revealed for a variety of methods. With a look toward the future, the field of cost estimation research is defined in this paper.

The cost effects of component commonality: a literature review through a management-accounting lens, Labro, E. (2004). Manufacturing & Service Operations Management, 6(4), 358-367. The same version of a component across many products focuses on the cost effects through increase and the component of commonality is reviewed in this paper.  Casual observations of practice in much of this composition is conjectural. Without increasing commonality, the cost will generally decrease as purported in this literature. In conclusion, the cost picture is more subtle when you distinguish between the cost-rate effects and the cost driver through the framework of activity-based costing. That is to say, any general statements about total costs and the effect of increasing commonality are too soon to speculate. The room for future research is evident, which at this point are limited to empirical literature that involves case studies combined with simulation in some instances.

Accounting: Advanced Manufacturing Strategies Are Often Undermined by Legacy Control Systems of Another Era. One Concept-Time-Based Accounting, Hutchinson, R. (2007). Management Accounting Quarterly, 9(1), 31. In this paper we see that the legacy control systems of another era often undermine the advanced manufacturing strategies. New business strategies have been adopted in response to the aggressive competition of global business today. These strategies include time-based manufacturing or TBM. There are a small number of companies who attribute their success to TBM, while other’s however have seen very little performance enhancement. Among managerial accounting scholars it has been recognized that there is a growing need for more innovative studies to fill in the gaps of knowledge.

Pricing policy in relation to financial control, Brown, D. (2003). Alfred P. Sloan: Critical Evaluations in Business and Management, 1(3), 101. The DuPont Formula also known as Return on Investment (ROI) Measure was created by Donaldson Brown in 1914. This was not his only contribution to the field of financial management. He defined pricing processes that were cutting edge and his ideas supported a variety of planning and forecasting techniques. During the 1950’s, the ROI technique was seen as a dominant approach to financial management and is today one of Brown’s defining achievements.

Product costing in service organizations, Brignall, T. J., Fitzgerald, L., Johnston, R., & Silvestro, R. (1991). Management Accounting Research, 2(4), 227-248. In manufacturing businesses empirical evidence and conventional wisdom prescribes that the costs of products are utilized for a variety of purposes such as the evaluation of inventory, pricing, management planning and control. In this regard, the validity of five large for profit service organizations are explored through three specific uses in the service sector. There are three conclusions and the first one reveals that valuation of inventory isn’t a major issue as much as the perishability of services unable to be stored. As for the second, full product costs are only used by two of the five organizations for decisions related to pricing. Lastly, the costs were planned and controlled through all five of the organizations through responsibility centers attached to functional activities instead of services and products that weren’t useful and units of analysis. Responsibility centers that are closely aligned to the service organization through value chains offer an advantage competitively and prove additional research and case study is warranted in this area.

A business game for the introductory course in accounting, Gray, J., Willingham, J., & Johnston, K. (1963). The Accounting Review, 38(2), 336. According to this paper the board game Monopoly ® is an exercise in economic simulation created to aid in the understanding the impact of the accounting cycle on financial statements that are used in the evaluation of the performance of management. The main idea is that through the use of strategies and rules the reality of business and economics can be effectively simulated in an interactive and practical set.

Time-driven activity-based costing, Kaplan, R., & Anderson, S. (2003). Time-driven activity-based costing. Implementation of the ABC model has been a struggle for many organizations due to the incurred high costs of interviewing and surveying people initially. Validating the allocation of time and the difficulty of updates and maintaining the model have aided in this difficulty. Other factors that lend to the difficulty are resource and processes spending changes, the addition of new activities, and increases in the complexity and diversity of orders, customers, and channels. There are only two parameters requiring estimates of time-driven ABC: (1) the supplying capacity unit cost and (2) the length of time necessary to execute the activity or transaction. For the ABC model that is time-driven: installation and estimation are quick – resource costs, variety in orders, and process changes are easily reflected in updates – CRM and ERP systems can be data fed from transactions – unit times under direct observation of model estimates can be validated – millions of transactions can easily be scaled with fast processing times delivered through real time reporting – the unused resources of management capacity are highlighted and explicitly incorporated – without expanding the model of complexity variation of orders and customer behavior are exploited through time equations. The articulation of the fundamentals of time-driven ABC through the simplicity of numerical examples are revealed in the paper for companies that have seen quick and considerable improvments.

Accounting for continuous improvement, Turney, P. B., & Anderson, B. (1989). MIT Sloan Management Review, 30(2), 37. Similar to issues faced by many U.S. companies, in 1981 the Japanese owned Tektronix faced entering the portables market to the measurement of electronic instruments. This created intense pressures competitively. Products had to be priced much lower than the prevailing market. Despite limited performance and quality, the capital market share was captured.

Concepts underlying interim financial statements, Shillinglaw, G. (1961). The Accounting Review, 36(2), 222. The research will examine the pragmatic extent of the prevalence of interim financial reporting and its effect on the volatility of stock prices through the fiscal year in relation to the reporting styles of four different countries. Canada and the United States both use quarterly reporting, while Australia and Great Britain use reporting on the semi-annual interim. The hypothesis is in the predicative value and timeliness tradeoff of these interim reports, lessor priced volatility will be reflected after various influences have been accounted for.

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