In professional services organizations, budgeting often needs to cover multiple lines of business. When a few employees serve multiple departments simultaneously, how to accurately account for project revenue and expenses becomes a key issue for financial and operational management. Based on actual cases, this article explores how revenue and expenses contributed by cross-departmental employees should be attributed, and analyzes the pros and cons of different methods.

Case Background

Assume an employee, Joe, belongs to the engineering department, and his direct supervisor is Fred. Due to resource allocation and the software department winning a large project, Joe will use his billable hours to assist with that software project. In this case, should the revenue generated by Joe's work be credited to Fred's engineering department (due to his direct reporting relationship) or to the software department (due to project ownership)? Additionally, should Joe's compensation expenses be transferred along with the revenue?

Two Common Accounting Methods

In industry practice, there are typically two accounting logics:

  • Method 1: Revenue follows employee—That is, revenue is credited to the employee's permanent department (e.g., engineering department), and expenses also remain in that department. This method emphasizes the stability of the organizational structure, facilitating the assessment of department heads' overall management responsibility for their subordinates.
  • Method 2: Expense follows revenue—That is, revenue is credited to the department where the revenue-generating project resides (e.g., software department), and the employee's related expenses (such as salary and benefits) are also transferred to that department. This method emphasizes the completeness of project profit, making project managers responsible for project profitability.

Advantages and Disadvantages of Method 1

Advantages:Simple accounting, no need for frequent adjustments to personnel assignments; departmental budgets are relatively stable, facilitating long-term workforce planning; avoids significant revenue fluctuations in departments due to temporary projects.

Disadvantages:May lead to a mismatch between revenue and costs—the engineering department may see inflated revenue due to employees supporting other projects, but actual project costs (such as travel and outsourcing) occur in the software department; meanwhile, the software department's project profit is underestimated, affecting the accuracy of its performance evaluation.

Advantages and Disadvantages of Method 2

Advantages:Enables project-level profit accounting, consolidating revenue and direct costs (including labor costs) in the same department, more accurately reflecting project profitability; incentivizes department heads to optimize resource use, avoiding "free-riding" phenomena.

Disadvantages:Requires establishing cross-departmental time tracking and cost allocation mechanisms, increasing administrative burden; frequent transfers of personnel expenses may cause budget conflicts between departments, especially when employees participate in multiple projects simultaneously, making allocation ratios difficult to determine precisely.

Common Industry Practices

According to common practices in the professional services industry, most organizations tend to adopt the principle of"Revenue follows project, expense follows revenue"(i.e., Method 2), especially when projects are large in scale or cross-departmental collaboration is frequent. This is because project profit is a core metric for measuring business line performance, and transferring employee expenses to the project's department more clearly reflects the true contribution of each business line. However, for short-term employee support or non-core projects, some companies adopt simplified handling, where revenue remains in the permanent department, but departmental profit is adjusted through intercompany charges or transfer pricing mechanisms.

Key Considerations

When choosing a method, the following factors should be comprehensively considered:

  • Organizational assessment goals:If departmental profit is the focus of assessment, Method 2 is more reasonable; if departmental cost control or personnel utilization is the priority, Method 1 is more suitable.
  • Project duration and scale:Long-term large projects should adopt Method 2, while short-term support can be handled flexibly.
  • Data system support:Method 2 requires precise time tracking and cost allocation systems; if the company's informatization level is insufficient, implementation may be difficult.
  • Interdepartmental collaboration culture:If interdepartmental collaboration is frequent, Method 2 can reduce internal gaming, but fair settlement rules need to be established.

Conclusion and Recommendations

In summary, there is no absolute "standard" method, but the industry trend leans toward "revenue and expenses from the same source" (i.e., Method 2) to support project profit analysis. It is recommended that when preparing budgets, your company first clarify assessment goals, then choose the most suitable accounting model based on existing ERP or project management systems. If adopting Method 2, be sure to communicate with department heads to ensure accurate time recording and establish clear allocation rules.

We hope the above analysis is helpful to you. If you have further questions, feel free to continue the discussion.