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A burden rate is an expense that exceeds standard expenses which have been accounted for. People can use this term in two different senses. In one sense, it refers to the cost of maintaining employees on the payroll, while in the second sense, it involves the burden rate for producing goods and services. This rate must be accounted for to provide a complete picture of the costs associated with running a business.
People commonly use this term in reference to labor, and may also call it the wholesale labor cost. The burden rate involves expenses undertaken by the employer on behalf of employees beyond the basic employee payroll. For every employee on the payroll, companies pay things like payroll taxes and unemployment insurance. These contribute to the burden rate, because they are not directly accounted for when disclosing payroll costs. Companies which offer benefits such as health insurance and paid time off would also include these expenses in the wholesale labor cost.
To determine the burden rate for labor, a company looks at the payroll costs incurred during a given period and then adds the expenses beyond payroll. Sometimes, the rate may be 50% or higher, meaning that for every unit of currency the company applies to payroll, half a unit is paid in associated costs. A high wholesale labor cost can indicate that a company is offering numerous benefits to employees, but it can also be a sign of operating inefficiency and may be a cause for concern when it is disclosed on financial statements.
Manufacturers can also report a burden rate for the production of products. Costs associated with making products can fall into a number of different accounting categories, ranging from the costs of raw materials to produce to the costs to keep line workers employed. Costs which are not directly accounted for in other ways can add to the load of production costs. A high burden rate adds to the overall cost per unit, which explains why some things which seem cheap to produce can be expensive.
Financial disclosures published by companies which are required to disclose by law must show the burden rate. In addition, this rate rate is usually monitored in the books of private companies because it is an important consideration. In the event that a company is inspected by tax authorities, this accounting entry is one of the things which will be examined to learn more about the company's operations and accounting practices.
A family friend, who is a corporate manager, was telling us about a new concept in handling the burden rate. This is to see clearly how money is spent in different categories.
He called it "open book management." The heads of a company show and explain to the employees the profits and costs. The employees need to understand how the costs of their activities affect the products or services of the company. The employees should know if they are given more incentives or benefits, the company should see cost savings.
It sure costs a lot to provide employees with benefits, such as health, unemployment, vacation and other benefits. I can see why it's called burden rate. If the burden rate is often 50%, I can understand why employers are cutting health benefits.
It seems that it would be challenging to try to keep a good balance between the costs of everything from raw materials to having enough work to keep your workers busy. It's not an easy job keeping a company running smoothly.
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