In the utilization rate formula, Direct Salary Expense refers to the salary expense for:

• A. The employee's time billed to clients
• B. The employee's total annual salary
• C. Overhead allocated to the project
• D. All salaries in the firm

Answer: (A)

Utilization rate looks at how much of a staff member’s pay is tied to billable client work. Direct Salary Expense is the portion of salary that corresponds to time actually billed to clients. It excludes non-billable activities and overhead, which is why it’s not the whole annual salary, not overhead, and not every salary in the firm. For example, if someone earns $100,000 but only $60,000 of that is time billed to clients, the direct salary expense is $60,000, which is the figure used in calculating utilization.