Chapter 8

Planning and Controlling Direct Labor Cost

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Learning Objectives

After studying this chapter, the student will be able

to elaborate the direct labor cost budget by

product and to elaborate the appropriate control

reports for a given manufacturing or

nonmanufacturing company.

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Introduction

1. Planning and controlling labor cost involve major and complex areas:

2. Personnel needs

3. Recruitment

4. Training

5. Job description and evaluation

6. Performance measurement

7. Union negotiations

8. Wage and salary administration Omar Maguiña Rivero

Direct Labor Cost

Direct labor force include the wages paid to employees who work directly on specific productive output.

Direct material and direct labor force are frequently referred (collectively) as prime cost of product .

Approaches Used in Planning Direct Labor Cost

For the annual profit plan, the direct labor budget

should be developed by responsibility centers,

reporting period, and products.

Approaches Used in Planning Direct Labor Budget

1. Estimate the standard direct labor hours required for each unit of each product; then estimates the average wage rates by department, cost center, or operation.

Multiply the standard time per unit of product by the average hourly wage rate, giving the direct labor cost per unit of output for the department, cost center, or operation.

Multiply the units of output planned for the department, cost center or operation by the unit direct labor cost rate to obtain the total labor cost by product.

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Approaches Used in Planning Direct Labor Budget

2. Estimate ratios of direct labor cost to some measure of output that can be planned realistically.

3. Develop personnel tables by enumerating personnel requirements (including costs) for direct labor in each responsibility center.

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Planning Direct Labor Hours

An important function of industrial engineers is to develop standard labor times for various operations and product.

Approaches used in planning standard labor times:

1. Time and motion studies

2. Standard Cost

3. Direct estimate by supervisors

4. Statistical estimates by staff groups

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Learning Curve

Considerable experience indicates that in some manufacturing setting, there is a constant percentage reduction in the average time input of direct labor per unit of product as the cumulative output doubles.

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Experience Curve

When applied to all production costs, the learning curve is called “experience curve”

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Planning Wage Rates

The preferred approach to plan a wage rate is to

enumerate the direct labor cost employees in a

department or operation and their expected wage

rates, and then compute an average.

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Planning Wage Rates

A less-reliable approach to plan a wage rate involves

computing the historical ratio between wages paid

and direct labor hours worked in the department.

The historical ratio is then adjusted for conditions

that have changed or are expected to change.

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Planning Wage Rates

The alternative approach to plan a wage rate is to

estimate total direct labor cost and then allocate it

to 1) units of production or 2) some other measures

of output, such as machine hours, direct material

cost, or processing time.

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