The relationship between labor hours (minutes per unit) and wage rate (cost per hour) was once applied to calculate the payment processing fee (standard labor hours × standard wage rate) under an agreement between the ordering party and the subcontractor. However, in standard costing, labor hours are treated as efficiency, and the wage rate as an allocation rate, adopted for formulating the next fiscal year’s budget. Cost Management in Indonesia Mass production factories, such as two- and four-wheeler parts manufacturers common in Indonesia, have multiple manufacturing processes. In such cases, processing costs are calculated for each process, and the method of aggregating these costs into the product is called process costing. In this approach, labor costs and manufacturing overheads are recorded at the end of the month by the accounting department, transferred to inventory assets, and then allocated accordingly. On the other hand, in factories producing custom-made items under individual order production, job order costing is used, where costs are aggregated by order number or project number. In this case, ... 続きを見る
Actual Labor Hours and Standard Labor Hours
To calculate direct labor costs per product in a cost management system, it seems reasonable to apportion the semi-gross direct labor costs aggregated by cost center or product group from the accounting system using direct working hours as the allocation ratio. However, the challenge lies in how to obtain the direct working hours per product. Ignoring the fact that the effort required differs by product and simply apportioning by production result quantity is, frankly, not a viable approach.
If direct working hours are accurately recorded per product in the daily work report, aggregating them at the end of the month would suffice. However, since indirect tasks or time away from the shop floor occur between direct tasks, obtaining only the actual direct working hours per item from daily reports is a bit challenging unless there’s a system with shop floor terminals or touch panels that allow easy input of start and end times.
In Japanese manufacturing companies in Indonesia, only highly IT-advanced factories have likely systematized the aggregation of direct working hours. The main methods for aggregating direct working hours are the following two, essentially differing in whether they are calculated cumulatively from the start or by subtraction from the end:
- Input the start and end times of direct tasks via shop floor terminals and sum them up
- Deduct indirect working hours and non-operating time from attendance data
To apportion direct working hours aggregated by cost center to individual products, both the “effort required per product” mentioned above and the production result quantity must be considered. The indicator of this effort per product is the standard labor hours (how many minutes per unit are standardly required).
- Standard Labor Hours × Production Result Quantity
Whether using a system or manually calculating in Excel, calculating direct working hours per product in advance is essential to compute manufacturing costs per product.
- Direct Working Hours per Product = Total Direct Working Hours × {(Standard Labor Hours × Production Result Quantity) / SUM(Standard Labor Hours × Production Result Quantity)}
Direct labor costs per product are calculated by multiplying the calculated direct working hours per product by the wage rate (cost per hour). This wage rate is computed by cost center or product group as follows:
- Total Wages ÷ Total Direct Working Hours = Direct Labor Cost Wage Rate
At this point, the direct labor cost, a cost element per product, is finally calculated:
- Direct Working Hours per Product × Wage Rate = Direct Labor Costs per Product
The direct labor cost per unit is obtained by multiplying the actual labor hours (how many minutes it actually took per unit, calculated by dividing direct working hours per product by production quantity) by the wage rate. Since labor hours are typically in minutes and the wage rate is in hours, the units need to be aligned.
- Actual Labor Hours × Wage Rate = Direct Labor Cost per Unit
Actual Wage Rate and Standard Wage Rate
A salary is a fixed monthly cost, while wages, such as overtime pay, are variable costs based on working hours. Embarrassingly, I only recently learned this distinction.
The wage rate is akin to an hourly wage for part-time work. Just as an hourly wage is fixed by contract during an interview and remains constant whether you’re working tirelessly alone or taking a break sitting on a toilet seat while cleaning, it’s common to use a standard (planned) wage rate.
In a cost management system, the wage rate is the actual wage rate obtained as a calculation result after the fact. When manually calculating in Excel, the wage rate is the standard wage rate prepared in advance for direct labor cost computation.
Whether you’re swamped working alone or slacking off in the restroom, the actual amount received as a part-time wage remains the same. However, from the employer’s perspective, the wage rate increases the more the worker slacks off. Thus, rather than fixing the wage rate as a standard, it should be updated annually based on performance assessments to avoid a sense of unfairness and maintain morale on the shop floor.