labor is the cost of the person(s) that actually manufactures
product. This person is involved in creating value in
employees manufacture or assemble all or part of a product.
Some of the jobs that they will do are:
You can see the pattern; this person is creating a valuable product or
service that can be sold. Direct labor cost is an important cost for
the cost accountant to track. This is a very controllable cost and
therefore, is reviewed constantly to see if improvements can be made.
Some of these improvements would be to automate the process and
eliminate some labor, design the work cell so as to increase the amount
of product the direct labor employees can produce in a given amount of
the direct labor employees are the only people in the company that
produce income. They are taking raw materials and converting them into
a useful item that can be sold. All other employees of the company are
important, but all others are supporting the creation of value in the
product or are involved in the sale of the product.
Cost per Part:
Most cost systems use a standard cost. For direct labor, the
standard cost is the amount per hour the employee earns plus the cost
to the employer for employment taxes and benefits.
The standard labor cost per
is calculated by taking the labor cost per hour divided by the
parts per hour the employee is able to produce. The standard quantity
produced is arrived at by starting with a 60 minute hour and
subtracting from this the break times, machine downtime, etc.
Then, the amount of parts that can be produced by the machines is
determined. With this information, a standard parts produced can be
determined. For example:
- 60 minutes less 5 minutes for employee break,
less machine downtime of 5 minutes = 50 minutes work time.
- The machinery can produce 10 parts in 50
- Two employees are required to operate the
- 50 minutes standard work time per hour divided
by 10 pcs per hour = standard run time of 5 minutes per part
- 2 employees at $10 per hour each or $20 per
hour total, divided by 60 minutes = $.333 per minute labor cost
- Out part takes 5 minutes to produce, so 5 x
$.333 per minute = $1.665 standard direct labor cost per part.
amount is our standard labor cost per part. This standard amount is
usually not changed for the entire year. If the labor rate changes next
year or the amount of parts produced changes, then the standard will be
adjusted next year. The reason we don't change the standard for a whole
year, is so an analysis can be done against the standard cost to
determine if the cost is improving or getting worse when compared with
what the actual cost is.
employees usually fill out time cards. Either the employee
herself or a clerk will enter the time worked and what jobs were worked
on. An accurate collection of employee time worked on product provides
a wealth of information for analysis.
the amount of downtime and the reason for the downtime is also
collected, then problems can be identified that are causing the
downtime and solutions can be implemented.
Information is collected and input into the MRP
system. From this system many reports can be run to help management run