The key cost element of programs is people. Accurately calculating the costs of the staff of an organization is an essential skill of a competent budget analyst. Proper analysis of staffing costs is the foundation of the contribution that budgeting makes to management of an agency and its operating components. Conclusions reached from analysis lead to management action. A detailed example of PC&B calculations with explanations is provided, as well as examples of payroll cost items as well as an example of what can happen when it is not done well.
There are many ways to do payroll (or personnel compensation and benefits (PC&B) calculations, ranging from very simple ones to complicated ones. The simplest way is to assume that the future payroll for the year of interest will be the same as the current year; in this case the accounting system results give the numbers for the future. More complicated ways include adding up every individual's pay and benefits for the period of interest, project changes in positions, and account for many other potential changes. Which types of calculations are made depend on the accuracy desired, information available and time and resources available to make the calculations.
Paradoxically, very small and very large organizations can use simpler systems. In the small organization there may be few variables and one person may know everything that is needed to make a very accurate computation. In large organizations various factors tend to offset each other, and the computation may not be very complicated at all. The organizations with a few hundred to a few thousand people on the payroll are the ones that have to put some effort into their payroll computations because their operations are complicated and they cannot rely on things canceling each other out.