How is utilization rate defined?

• A. Direct Salary Expense / Base Salary
• B. Hours billed to client / total hours
• C. Overhead rate
• D. Profit margin

Answer: (A)

Utilization rate expresses how much of payroll effort is being dedicated to client work, shown as a percentage of salary cost. It is defined as Direct Salary Expense divided by Base Salary.

• Direct Salary Expense represents the portion of salaries spent on work that goes directly to client projects (the billable portion).

• Base Salary is the total salary cost for the positions involved, before allocating to overhead or non-billable activities.

For example, if the base salary for a team is $100,000 and the portion of that salary spent on direct billable work is $80,000, the utilization rate is 80%. This metric helps indicate how effectively payroll resources are being used for revenue-generating work and informs staffing and pricing decisions.

While another common measure looks at hours billed to clients divided by total hours worked, this question follows the cost-based approach, focusing on the share of salary tied to billable effort rather than just time.