PCM Ch. 7

Question 1

Accrual Based Accounting

Answer 1

Revenue earned and billed from fees and expenses including outside fees/consultant’s fees/expenses + direct & indirect expenses incurred (aka based on invoiced fee/expenses send and/or received). Used for profit-loss statement and balance sheet development. Does not consider actual receipt or payment of any money.

Question 2

Cash Basis Accounting

Answer 2

Income received and all salaries/expenses paid (checkbook approach). Basis for filing and paying quarterly/year end taxes. Establishes firm’s for cash-flow management effectiveness & tax liability

Question 3

Net Operating Revenue

Answer 3

Represents net dollars remaining after deducting the invoiced consultant’s fees/expenses & all reimbursable/non-reimbursable project-related expenses

Question 4

Direct Labor

Answer 4

Represents time CHARGED to projects, whether invoiced or not (by everyone, including principals). Same as direct salary.

Question 5

Indirect Labor

Answer 5

Time charged to non-project-related activities (by everyone including principals). Same as indirect salary. Indirect labor included in calculation of total indirect expenses.

Question 6

Reimbursable Expenses

Answer 6

Project-related expenses that are invoiced to the client in addition to fees. Includes markup percentage on those expenses. The markup dollars are a form of revenue and are included in net operating revenue.

Question 7

Direct Expense

Answer 7

Project-related expenses for a firm and its outside consultants that are not reimbursable + project-related project related expenses included in all lump sum fee contracts.

Question 8

Indirect Expense

Answer 8

General and administrative non-project-related operating expenses (total indirect expenses includes indirect labor).

Question 9

Overhead Rate

Answer 9

The ratio of total indirect expenses to total direct labor

Question 10

Break-even rate

Answer 10

Overhead rate + unit cost of 1.00 of an hour of salary (ex: overhead rate of 1.30 + 1.00 = break-even rate of 2.30. This means for every $1.00 of salary the firm must recapture $2.30 just to break even).

Question 11

Utilization Rate

Answer 11

Direct Labor as percentage of total labor (individual rate = dollars; firm rate = dollars).

Question 12

Hourly Billing Rate

Answer 12

Dollar amount charged to a client relative to one hour of direct labor.

Question 13

Net Multiplier

Answer 13

Ratio of net operating revenue (NOR) to total direct labor. AKA Measure of return on every dollar of direct labor.

Question 14

Net Profit

Answer 14

Dollars remaining after deducting all direct labor and indirect labor and indirect expenses (before any distributions are made/tax paid).

Question 15

Current Earnings

Answer 15

Net dollar amount after all distributions are made & all applicable taxes have been deducted.