What is the utilization rate formula?

• A. Total base salaries divided by total direct salary
• B. Indirect costs divided by total salaries
• C. Total revenue divided by total salaries
• D. Total direct salary expenses divided by total base salaries

Answer: (D)

Utilization rate shows how much of the payroll is being used for billable, project-related work. It is calculated by comparing the direct labor tied to projects to the base compensation available for that labor. The correct formula is total direct salary expenses divided by total base salaries. This ratio tells you what portion of the base salary capacity is actually being consumed by direct, billable work.

Understanding the terms helps: total direct salary expenses are the costs tied to personnel working on client projects (the billable portion of compensation), while total base salaries are the fixed, non-billable portion of compensation used as a baseline. A higher ratio indicates more of the base capacity is being utilized for direct work, whereas a lower ratio suggests more non-billable or overhead time.

Why other options aren’t the right way to measure utilization: dividing indirect costs by total salaries would give an overhead-related metric, not utilization. Dividing total revenue by total salaries yields revenue per salary, not how much payroll is used for billable work. And swapping the order (or mixing terms) would not reflect the true relationship between billable labor and base compensation.