On Timesheets and Cost Allocation

Earlier this week I received an email from friend of VeraSage, Kirk Bowman of Mighty Data, who, by the way, his given himself the great title of Visionary of Value in his email signature and on his business card. He writes:

At the most recent meeting of our FileMaker Business Group this week, I got a question for which I did not have a good answer. The question is, if we are not tracking time, how do I know if a specific project is profitable? They were asking for a metric to measure financial success or failure on a project by project basis. I’m going to review the slides from August but I thought I would ask your input also.

The short answer is, “If overall profit is up xx percent, who cares?”

The more detailed answer: You allocate your costs ahead of time, like Toyota does as they do not have a traditional cost accounting system. They use what is called targeted costing.

Say you plan to do 12 major projects a year and $1.2 million in overall cost. You would start by allocating $100,000 to each. Now some would argue that some projects are bigger than others. OK, fine. Let’s allocate $200,000 to two of them, $50,000 to four of them, and leave the remaining six at $100,000. Of course, you can adjust them based on your judgment, so long as the total remains $1.2 million.

Project Straight Adjusted
A 100,000 200,000
B 100,000 200,000
C 100,000 100,000
D 100,000 100,000
E 100,000 100,000
F 100,000 100,000
G 100,000 100,000
H 100,000 100,000
I 100,000 50,000
J 100,000 50,000
K 100,000 50,000
L 100,000 50,000
Total 1,200,000 1,200,000

Is it perfect? No, but allocating costs based on a time unit is just as flawed as assigning value to the customer based on a time unit. It is the same false premise: value or cost does not equal rate times hours.

Is an hour billed on a project a good thing or a bad thing? No one knows, some hours might be good others bad. It is a judgment and therefore there is no reason to measure it. Allocating costs as above will make you approximately correct, rather than precisely wrong!

Tracking time might make you a better cost accountant, but cost accountants make lousy pricers. I would rather be a better pricer.

Lastly, timesheets are the cancer of the professions. They cause us to focus on the wrong things, the inputs. Professionals should focus on the right things, the outputs to the customer: deliverables, objectives, overcoming risks, solving issues, etc.



  1. Ed,

    I am completely on board with the negatives of hourly billing. While I know the VeraSage folks don’t like to talk about “efficiency”, one of the most succinct ways I use to explain to others the folly of hourly billing is that it rewards inefficiency and punishes efficiency (from the service provider’s perspective; from the client’s it’s obviously the opposite).

    But I still cannot see time-tracking being totally irrelevant. You mention target costing, which I agree is the appropriate pricing practice. But how can you plan your time requirements in advance if you have no historical data on how long certain activities take? I run an outsourcing practice that provides a fully-managed accounting function – what ADP does for payroll, we do for the entire finance function, including the CFO/controller roles for emerging growth companies. If I have no idea how long it takes to do a weekly A/P check run of 50 payments, how can I plan the resource requirement in advance and do target costing? Regarding your comments on project profitability, how can I say “who cares” if over the past year it took a full-time equivalent (FTE) to serve the client while the price I received failed to cover an FTE’s salary?

    Best Regards,
    Jim Caruso

  2. Jim, sorry for the delay on following up.

    Might I suggest you read my article which appeared in the April 2010 issue of the Journal of Accountancy –> http://www.journalofaccountancy.com/Issues/2010/Apr/20092306.htm

    I believe I address your issue directly. If you are still not convinced, let me know.

    Thanks for you patience.

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