Activity Based Costing in HR

When confronted with the question “what is the total cost of your HR?” most CEO’s and HR directors come up short. They will either look at the HR budget and say it represents the total costs or they will tell you that they don’t really know.

Why does it matter? Well, by understanding the true cost of a service it will help the leadership making better  economic decisions.  Should some of our HR services be outsourced? What is the ROI on our HR services? Such questions are almost impossible to answer if the true cost of the service is not understood.

There are different ways of measuring the true cost of HR. Activity Based Costing (ABC) is in my view the best. ABC attempts to assign overhead based upon the activities that case the overhead rather on a pro-rate basis or any other arbitrary method. ABC examines each activity and establishes the cost drivers behind each activity.

ABC will include costs such as administrative costs, building costs, IT spend and management time in the equation and come up with a number which show the real cost of HR. ABC can be a tedious task and at some point a cut-off must be made and assumptions be made for the rest. But it is worth it.

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