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Direct Labor

Do you include labor in your WIP costs? Or do you write it off as O/H expense? In other words - direct costs would never include internal labor costs.

Reasons for or against...

Roxanne Cowan
Rutherford Bolen Group Integrated Marketing

We include. Reasons: IMHO it's the correct accounting (revenue/expense matching), and IRS requires it under Unicap rules.

We charge design/production payroll directly to cost of sales. At end of month we make 2 adjustments. (1) For admin time of design/prod staff we move cost to administrative time (categorized with overhead expenses). I can make arguments for or against doing this, but it was done in the past so I continue it for comparability. (2) We take WIP as computed by C&P and capitalize. The +/- adjustment is in cost of sales, and I group it with labor even though it's a mixture of client costs and labor (I'm too lazy to do the work of splitting it up).

For adjustment (1), we use actual pay rate charging in and out. For adjustment (2), however, we use a loaded rate which includes taxes, benefits, overhead, etc. -- at least a reasonable pass at what the IRS requires.

Brent A. Byrd
Point Zero, Inc.

We do not include any labor (I assume it is our time on a job). It's strictly outside costs that show up in our WIP.

Reason we don't accrue time is that you can never recover the amount that that time is worth. And your Bank and Auditors will have difficulty accepting your time as a WIP on your balance sheet. Although some of them are starting to recognize the value of our time in service industries.

Some agencies (mostly that run profit centres within their agencies) charge for some internal services as if they are an outside costs. For example, some agencies charge for Scans, colour prints, or Mac work as if it was contracted out. You can accrue those costs if you wish.

Hope I answered your question.

Johnson Paul
Controller
Campbell Michener & Lee Incorporated

No

Pam Brosch, CPA
Chief Financial Officer
HSR Business to Business Inc.

Labour would never be included in direct costs in our case as it would be already paid for under salaries in the P&L expenses and therefore internal cost & 100% revenue when billed. Unless of course it is a freelancer and the cost of the freelancer goes on the job and is therefore included in direct costs.

Kristy Oxenham
Financial Controller
Creativebank

We include labor as part of our WIP costs. In my mind labor is HARD, solid and real costs, just as buyouts are. It is money that we have to pay. Our cost is based on the employee's total cost - salary, benefits, bonuses, health insurance and more - then to that we add our overhead costs divided by the amount of employees in the office. We then divide this number by approx 2000 (which accounts for vacations, non-billable administration, sick days and reading CNN on the Web. This is our minimum hourly rate to bill, which breaks even. To add our profit, we add 20%-50%-100% markup depending on the project, client and what the market will allow.

Joe Notovitz
Notovitz Communications