6.5 Personnel Cost versus Non-Personnel Cost

We make the distinction between personnel and non-personnel cost. Personnel cost are usually the largest single component of a budget and include wages, salaries, and fringe benefits. In general, total salary expenses are defined as \(N \times w\) where \(N\) represents the number of workers in a given working grade and \(w\) represents the wage per worker for said working grade. Whereas non-personnel cost are relatively straightforward to calculate and ultimately result in the cost per unit produced or provided times the number of units, personnel cost need to keep track of the steps (grades) which vary with education, experience, and tenure of each employee.

Budgeting for non-personnel cost can be done by the so-called incremental method, which adjust past cost for inflation, i.e., last years expenditures times (1+inflation rate). Since this method does not account for the possibility of input substitution, the unit cost method can be use that calculates $ per unit of output (unit costs).