Budgeting Basics and Beyond

12.2. Headcount Forecast Algorithms^[]

^[] Michael Gilchrist, Diane D. Pattison, and Ronald J. Kudla, "Controlling Indirect Costs with Head-count Forecast Algorithms," Management Accounting, August 1985, pp. 47-48.

How do you control indirect costs in a dynamic environment? One answer is an indirect headcount (cost) algorithm. The headcount algorithm is a systematic method that helps managers evaluate requests for additional staffing of indirect product specialists or heads and at the same time control indirect costs and improve productivity. Intel managers found it especially helpful when considering the reallocation of resources among rapidly expanding or contracting product groups.

The concept of using algorithms to control costs is not new. Management accountants use similar algorithms to control variable expenses. For example, the flexible budget typically adjusts the allowance for variable indirect costs based upon some measure of manufacturing activity. Control is enhanced when actual costs are compared with the flexible budget allowance for the level of volume actually experienced. As the operations become more capital intensive and indirect fixed costs become a larger segment of the total expenses controls that focus on variable indirect costs are no longer adequate.

At Intel a major component of indirect costs is salaries for marketing and other product support groups. Traditionally, such cost pools have been considered fixed costs. However, the headcount algorithm treats ...