The influence of operational resources and activities on indirect personnel costs: A multilevel modeling approach

ABSTRACT Indirect activities often represent an underemphasized, yet significant, contributing source of costs for organizations. In order to manage indirect costs, organizations must understand how these costs behave relative to changes in operational resources and activities. This is of particular interest to the Air Force and its sister services, because recent and projected reductions in defense spending are forcing reductions in their operational variables, and insufficient research exists to help them understand how this may influence indirect costs. Furthermore, although academic research on indirect costs has advanced the knowledge behind the modeling and behavior of indirect costs, significant gaps in the literature remain. Our research provides important and timely advances to the indirect cost literature. First, our research disaggregates the indirect cost pool and focuses on indirect personnel costs, which represent 33% of all Air Force indirect costs and are a leading source of indirect costs in many organizations. Second, we employ a multilevel modeling approach to capture the hierarchical nature of an enterprise, allowing us to assess the influence that each level of an organization has on indirect cost behavior and relationships. Third, we identify the operational variables that influence indirect personnel costs in the Air Force enterprise, providing Air Force decision-makers with evidence-based knowledge to inform decisions regarding budget reduction strategies.

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