Delivery Cost and Capacity

1The people and costs behind service

A managed services provider, or MSP, supplies technology services to clients. Delivery work is the service the MSP provides. It can include support, maintenance, onboarding, projects, and other agreed work. The team also spends time on administration, training, meetings, leave, and internal improvements. A cost model needs to distinguish the hours paid from the hours available for client delivery.

A cost pool is a defined group of costs used in an analysis. A delivery labor cost pool contains the employee costs assigned to delivery under the stated method. The pool must be supported by employee roles, payroll records, benefit records, and the approved mapping. A monthly payroll total alone does not supply that mapping.

The company has seven employees. The provided aggregates do not identify their roles or time allocations. Do not divide total payroll by seven and call the result the cost of a technician. That arithmetic would hide different roles, compensation, working time, and responsibilities.

The profit and loss statement, or P&L, records revenue and costs for a period. Cost of goods sold, or COGS, is the reported group of direct delivery and product costs under the company's classification.

The supplied September P&L records $70,774.66 of payroll COGS and $8,455.17 of employee benefits in overhead. Preserve those recorded classifications while building the analysis. A management allocation can explain costs differently from the ledger, but it must reconcile back to the ledger and be labeled as analysis. A bookkeeping reclassification requires the accountant's approved policy.

The CEO needs the analysis for questions such as whether another agreement fits within existing capacity, whether a client consumes more work than its price supports, and whether hiring is justified. The admin manager prepares the evidence and calculations. The CEO chooses staffing and pricing decisions with operational input.

2Loaded labor cost and payroll mapping

Loaded labor cost is compensation plus the employer-paid costs included in a stated labor-cost definition. It may include employer payroll taxes, employer benefit contributions, and other supported employment costs. State what the calculation includes and excludes.

Gross wages are employee earnings before deductions. Employee withholding is money withheld from those earnings for taxes or other obligations. Employer payroll taxes are costs owed by the employer under the applicable rules. Employee withholding is not an additional employer wage cost merely because the employer sends the money to a tax authority.

The company export separates wages, payroll tax, and payroll fees within its payroll COGS total. The composition of the payroll tax label is not established by the aggregate. Obtain the payroll register and accountant-approved mapping before treating that amount as employer load. The label's size is not a tax-rate benchmark.

For September, the selected wages are $54,715.93, the payroll tax label is $15,728.20, and payroll fees are $330.53. Their sum is $70,774.66. This checks the report subtotal. It does not establish the delivery employee share or the employer-only tax cost. Benefits remain separately recorded in overhead at $8,455.17.

Build the mapping by employee or approved role group in a restricted finance workbook. Identify supported compensation, employer costs, and the share assigned to delivery. If a person splits duties, choose a documented method based on actual responsibilities and reliable time evidence. Avoid assigning a convenient percentage merely to reach a desired margin.

Reconcile the mapped costs with the payroll and benefit accounts. An unexplained difference may indicate an omitted cost, a duplicated benefit, employee withholding treated as expense, or a period mismatch. Keep the difference visible until resolved. The CEO can review aggregated role-group results. Retain personal pay information in the approved confidential files.

3Paid hours and practical delivery capacity

Paid hours are the hours compensated under the employment arrangement. Practical delivery capacity is the realistic number of hours available for client work during a period after identified nondelivery time. Capacity depends on leave, training, meetings, internal responsibilities, and the way service work is organized.

Begin with the period's paid working time. Subtract planned leave and the time needed for known nondelivery responsibilities under the chosen method. Do not count the same exclusion twice. If paid leave is already removed from the starting work hours, subtracting it again understates capacity.

Actual client hours are the hours recorded against client work during the period under the time-recording definition. Recorded time may be incomplete or inconsistent. Explain whether time includes ticket investigation, project delivery, documentation, travel, and client meetings. Two employees can perform similar work while coding it differently.

Utilization is actual client hours divided by the stated capacity denominator. A utilization percentage is meaningless without the denominator. Dividing by all paid hours and dividing by practical delivery capacity produce different percentages for the same client work. State which measure the report uses.

Client work can require different skills and response coverage. A spare hour on one employee's calendar may not replace another employee's specialized capacity. Likewise, a monthly total can hide a week with overlapping leave or project deadlines. The CEO should examine skill and scheduling constraints with the service leader before treating total hours as interchangeable.

The course does not impose a universal utilization target. Use the company's service commitments, staff responsibilities, and time quality to select a working assumption. Record the assumption and test it against actual experience. A model should show the effect of changing capacity rather than conceal the choice in a formula.

4The hourly delivery cost

An hourly delivery cost divides a supported labor cost pool by a stated number of hours. The denominator determines what the rate means. A capacity-based rate divides by practical delivery capacity. An actual-hours rate divides by the client hours actually used. Both can be useful, but they answer different questions.

In a hypothetical example, a delivery group costs $12,000 for the month under the stated loaded-cost definition. Its practical delivery capacity is 200 hours, and it records 150 client hours. The capacity-based rate is $12,000 divided by 200 = $60 per available delivery hour. The actual-hours rate is $12,000 divided by 150 = $80 per used client hour.

Applying the $60 capacity rate to 150 client hours assigns $9,000 of labor cost to the work. The remaining $3,000 is the cost of unused practical capacity under this method. Applying the $80 actual-hours rate assigns the full $12,000 to the recorded client work. These are two allocations of the same cost pool.

The capacity method can help separate expensive client work from unused capacity. The actual-hours method fully absorbs the month's cost into the recorded client hours. Use one method consistently in a comparison and reconcile the total. Do not assign $12,000 using the actual-hours rate and then add the $3,000 unused-capacity cost again.

Hypothetical method	Rate	Meaning
Practical capacity	$12,000 ÷ 200 = $60/hour	Cost per available delivery hour
Actual client hours	$12,000 ÷ 150 = $80/hour	Full labor pool spread over used hours
Capacity allocation	150 × $60 = $9,000	Labor assigned to client work
Unused capacity	50 × $60 = $3,000	Remaining pool under capacity method

A client contribution is revenue minus the costs included in a stated client analysis. The practice example below subtracts allocated labor and direct software and leaves overhead and unused capacity separate. A cost rate measures the resources assigned to delivery. A selling price establishes what the client pays. Client pricing also has to cover other direct costs, overhead, risk, and the return required by the business. Session 9 adds client revenue and other direct costs to examine profitability.

5Vendor costs and the company reconciliation

Vendor delivery costs include software, subcontractors, and products assigned to client work under the company's policy. Some costs vary with users or devices. Others have minimum commitments or annual purchase terms. A client quantity reduction may not immediately reduce the supplier bill.

For September, vendor COGS is $36,061.76. Adding payroll COGS of $70,774.66 gives total COGS of $106,836.42. This is the accounting cost reconciliation in the provided export. Benefits of $8,455.17 are included in overhead, so adding them to reported COGS without an explicit reclassification would change the definition.

A management delivery model can allocate supported benefits to delivery for an internal analysis while reconciling the adjustment to the original report. Show the original COGS, approved analytical additions or removals, and resulting analytical pool. Identify the employee and benefit mapping that supports every adjustment.

The supplied company totals cannot establish client-level cost. Obtain the vendor invoice detail and link each item with the client, product, quantity, and service period where possible. Shared software may require a documented allocation. Internal-only software belongs in a separate category according to the policy.

A marginal cost is the additional cost caused by one more unit of work or a particular decision. If existing salaried capacity is available, another small agreement may not immediately increase payroll. It can still consume capacity that would otherwise serve another client. If capacity is exhausted, a new agreement may require hiring, subcontracting, or a reduced service promise.

Keep the full-cost view and the additional-cost view separately labeled. The CEO needs both when deciding whether to accept work, change price, or hire. The admin manager should not present the absence of an immediate new salary payment as evidence that delivery labor has no cost.

6Practice example: allocating delivery hours

Use the hypothetical $12,000 labor pool, 200 practical hours, and 150 actual client hours. Client A used 30 hours and paid $3,000 for the month. Direct client software cost was $500. Ignore overhead, taxes, and other costs. These assumptions are teaching figures, not company data or benchmarks.

Calculate utilization using practical capacity as the denominator. Calculate the capacity-based hourly rate.
Allocate labor to Client A using that rate. Subtract the allocated labor and software from the client's revenue.
Label the result as a contribution before overhead and unused capacity under this exercise's definition.
Calculate labor allocated to all client work and the remaining unused-capacity cost. Reconcile both to the $12,000 pool.
Repeat Client A's labor allocation using the actual-hours rate. Explain why the two client results differ and why the methods should not be mixed.

Check your work

Utilization is 150 ÷ 200 = 75% of practical capacity. The capacity rate is $12,000 ÷ 200 = $60/hour. Client A's allocated labor is 30 × $60 = $1,800. Its stated contribution is $3,000 - $1,800 - $500 = $700 before overhead and unused capacity.

All client labor allocation is 150 × $60 = $9,000. Unused capacity cost is 50 × $60 = $3,000. The two amounts reconcile to $12,000. Do not treat the $700 client result as final company profit.

The actual-hours rate is $12,000 ÷ 150 = $80/hour. Client A's labor allocation becomes $2,400 and its stated contribution becomes $100. This method spreads the entire labor pool over used client hours. It does not prove that Client A required different work; the denominator changed. Choose a method suited to the decision and show its reconciliation.

7Your company delivery evidence file

The admin manager prepares an evidence request for employee-role mapping, payroll register composition, employer benefits, paid working time, and client time records. Use the company financial reference for the original September totals. Keep the ledger classification unchanged while the accountant reviews the mapping.

Prepare a draft labor pool only for costs whose definition and assignment are supported. Mark missing items rather than inventing a per-employee cost. Build a capacity schedule with documented leave, meetings, training, and internal duties. Check time-recording quality with the people who perform service work.

The CEO reviews the proposed capacity assumptions and the staffing implications with operational input. The accountant reviews payroll and benefit classifications. The admin manager reconciles the approved analysis back to the original payroll, benefit, and vendor totals.

The deliverable is a delivery cost and capacity worksheet with a clear cost definition, hour denominator, reconciliation, and missing-evidence list. It becomes the foundation for client profitability and hiring analysis. A worksheet with unresolved inputs can still be useful if the unresolved inputs and their effects remain visible.

8Going deeper

Going deeper

Contribution margin in standard managerial accounting generally means revenue minus variable costs. The client contribution in this exercise uses an explicitly stated allocation of salaried labor and software, so its definition must remain visible. Do not compare it directly with a variable-cost contribution measure or a differently classified gross margin. For a particular decision, separately identify costs that truly change, existing costs that remain, and capacity that the decision consumes. A client can appear attractive on immediate cash cost while using capacity needed for more profitable work.

9The completed work

A supported delivery cost and capacity worksheet with definitions, reconciliation, and missing-evidence list.

Keep approved company work in your finance workspace. The course records study progress in this browser; it does not store your reports or forecast files.

11Glossary

Cost pool: A defined group of costs used in an analysis.
Loaded labor cost: Compensation plus the employer-paid costs included in a stated labor-cost definition.
Gross wages: Employee earnings before deductions.
Employee withholding: Money withheld from employee earnings for taxes or other obligations.
Practical delivery capacity: The realistic hours available for client work after identified nondelivery time during a period.
Actual client hours: Hours recorded against client work under the stated time-recording definition.
Utilization: Actual client hours divided by a stated capacity denominator.
Capacity-based rate: A supported labor cost pool divided by practical delivery capacity.
Actual-hours rate: A supported labor cost pool divided by actual recorded client hours.
Unused capacity cost: The cost remaining unassigned to client work under a capacity-based allocation method.
Marginal cost: The additional cost caused by one more unit of work or a particular decision.
Cost allocation: Assigning a defined cost pool to activities using a documented method.
Client contribution: Revenue minus the costs included in a stated client analysis; identify excluded overhead and unallocated costs.

12Sources

Company examples use the accrual reports supplied on October 6, 2026. Report periods, selected totals and limits are recorded in the company reference. Examples labeled practice use hypothetical inputs.

OpenStax: Contribution margin: Background reading on cost definitions and the distinction between contribution and allocated full cost.