Labor Cross Charge Approaches
In DPS project accounting, labor and revenue follow the project's organization. When employees work on a project in an organization other than their own, your enterprise can use labor cross charging in several different ways.
- Approach 1: Enterprises that measure the labor charged and the revenue earned by the employees in an organization often move labor expense and revenue back to each employee’s home organization.
- Approach 2: Enterprises that prefer to measure the labor charged and the revenue earned by the projects owned by each organization often transfer revenue (net of labor), back to the employee’s organization, or they transfer overhead to the organization that the employee charged.
- Approach 3: Enterprises that view cross charging as subletting services may transfer labor expense and revenue in the form of a consultant expense back to the employee's organization.
Enterprises use Approach 3 less often than Approaches 1 and 2. Whichever approach you use, you must negotiate or otherwise arrive at a transfer price.
If You Choose Approach 1
You may choose approach 1 for these reasons:
- An organization’s Income Statement reflects the revenue and expenses for all employees in that organization. This information is valuable to organizations who focus on their employee's effort, no matter which projects they charge.
- Labor "belongs" in the employee's organization, so the cross charge moves labor from the project’s to the employee’s organization.
- Revenue "belongs" in the employee’s organization, so the cross charge moves all or a portion of revenue from the project’s to the employee’s organization.
- Overhead "belongs" in the employee’s organization, so no cross charge entry is made for overhead.
| Approach 1 | ||
|---|---|---|
| Project Organization's Income Statement | ||
| A | Project Labor Revenue (from Revenue Generation) | 900.00 |
| B | Intercompany Revenue Transfer Out (from Cross Charging) | (900.00) |
| C | Direct Labor (from Timesheet Posting) | 300.00 |
| D | Intercompany Direct Labor Transfer Out (from Cross Charging) | (300.00) |
| Profit | -0- | |
| Employee Organization’s Income Statement | ||
| E | Intercompany Revenue Transfer In (from Cross Charging) | 900.00 |
| F | Intercompany Direct Labor Transfer In (from Cross Charging) | 300.00 |
| G | Actual Overhead Costs (employee’s organization) | 538.00 |
| Profit | 62.00 | |
If You Choose Approach 2
You may choose approach 2 for these reasons:
- An organization’s Income Statement reflects the revenue and expenses for all of the organization's projects, regardless of which organization the employee belongs to.
- Labor "belongs" to the project's organization, so no cross charge entry is made for labor.
- Revenue "belongs" in the project's organization, so no cross charge entry is made for revenue.
- Overhead "belongs" in the project’s organization, so the cross charge process moves some amount of overhead from the employee’s organization to the project’s organization.
| Approach 2 | ||
|---|---|---|
| Project Organization's Income Statement | ||
| A | Project Labor Revenue (from Revenue Generation) | 900.00 |
| C | Direct Labor (from Timesheet Posting) | 300.00 |
| H | Intercompany Overhead Transfer In (from Cross Charging) | 540.00 |
| Profit | 60.00 | |
| Employee Organization’s Income Statement | ||
| H | Intercompany Overhead Transfer Out (from Cross Charging) | (540.00) |
| I | Actual Overhead Costs (employee’s organization) | 538.00 |
| Profit | 2.00 | |
If You Choose Approach 3
You may choose approach 3 for these reasons:
- Labor and revenue "belong" in the project's organization, so no cross charge entry is made for labor.
- Overhead "belongs" in the employee's organization, so no cross charge entry is made for overhead.
- The cross charge process creates a journal entry moving consultant expense from the employee's organization to the project's organization.
| Approach 3 | ||
|---|---|---|
| Project Organization's Income Statement | ||
| A | Project Labor Revenue (from Revenue Generation) | 900.00 |
| C | Direct Labor (from Timesheet Posting) | 300.00 |
| H | Intercompany Consultant Expense In (from Cross Charging) | 540.00 |
| Profit | 60.00 | |
| Employee Organization’s Income Statement | ||
| H | Intercompany Consultant Expense Out (from Cross Charging) | (540.00) |
| I | Actual Overhead Costs (employee’s organization) | 538.00 |
| Profit | 2.00 | |