The relationship between labor hours and wage rates was once applied to calculate processing fees under agreements between clients and subcontractors. However, in standard cost accounting, labor hours are used as efficiency metrics, and wage rates are used as allocation rates for the formulation of the next year's budget.
-
-
Cost Management Systems in Indonesia
Mass production factories in Indonesia adopt comprehensive cost accounting. Custom order production factories adopt individual cost accounting.
続きを見る
What this article covers
- In standard cost accounting, labor hours are used as efficiency metrics, and wage rates are used as allocation rates for next year's budget formulation.
- Direct labor costs per product are calculated by multiplying direct working hours by the wage rate.
- Standard labor hours, considering labor intensity per product, serve as the allocation basis for direct working hours per product.
- Analyzing the variance between actual and standard wage rates enables efficient labor management.
- Review labor management and budget by examining the variance between actual and standard wage rates.
Actual Labor Hours and Standard Labor Hours
To calculate direct labor costs per product in a cost management system, it is appropriate to allocate semi-gross direct labor costs aggregated by cost center or product group using direct working hours as the allocation ratio. However, there is the issue of how to obtain direct working hours per product. Ignoring the differences in labor intensity per product and using production quantity allocation is not appropriate.
If direct working hours are accurately recorded per product in work reports, it is sufficient to aggregate them at the end of the month. However, indirect work and shop floor absences occur between direct work. Accurately obtaining only the actual direct working hours per item based on reports may be challenging unless there is a system where start and end times can be easily entered via a shop floor terminal or touch panel.
Case: In Japanese manufacturing industries in Indonesia, only highly IT-advanced factories have systemized the aggregation of direct working hours. Methods for aggregating direct working hours include entering start and end times of direct work from shop floor terminals and deducting indirect work and non-operating times from attendance data.
As a basis for allocating aggregated direct working hours by cost center to products, it is necessary to consider "labor intensity per product" and production quantity. This labor intensity indicator per product is the standard labor hours (how many minutes are standard per unit).
- Standard labor hours x Production quantity
To calculate manufacturing costs per product, whether using a system or manually calculating with Excel, it is essential to pre-calculate direct working hours per product.
- Direct working hours per product = Total direct working hours x {(Standard labor hours x Production quantity) / SUM(Standard labor hours x Production quantity)}
By multiplying the calculated direct working hours per product by the wage rate (cost per hour), direct labor costs per product are calculated. This wage rate is calculated by cost center or product group as follows:
- Total wages ÷ Total direct working hours = Direct labor cost wage rate
At this point, direct labor costs, a component of product-specific costs, are finally calculated.
- Direct working hours per product x Wage rate = Direct labor costs per product
The direct labor cost per unit is obtained by multiplying the actual labor hours per unit (actual minutes per unit) by the wage rate. Labor hours are usually in minutes, and wage rates are in hours, so units need to be aligned.
- Actual labor hours x Wage rate = Direct labor cost per unit
Actual Wage Rates and Standard Wage Rates
Salaries are fixed costs as monthly salaries, while wages are variable costs as compensation for working hours, such as overtime pay. I recently learned this difference. Wage rates are like hourly wages for part-time jobs, and it is common to use standard (planned) rates, just as hourly wages are fixed as a contract during interviews.
When using a cost management system, the wage rate is the actual wage rate obtained as a calculation result, while in manual Excel calculations, it is the standard wage rate prepared in advance for direct labor cost calculations. Even if busy with one-person operations or slacking off in the restroom, the actual amount received for part-time wages remains the same, but for employers, the wage rate increases the more the part-timer slacks off.
Frequently Asked Questions | Management of Labor Hours and Wage Rates in Cost Accounting
We summarize frequently asked questions in line with the content of this article.
How are labor hours and wage rates used in standard cost accounting?
In standard cost accounting, labor hours are used as efficiency metrics, and wage rates are used as allocation rates. This facilitates the formulation of the next year's budget.
How are direct labor costs per product calculated?
Direct labor costs per product are calculated by multiplying direct working hours per product by the wage rate. Direct working hours per product are obtained by allocating total direct working hours based on labor intensity per product and production quantity.
What is the difference between actual wage rates and standard wage rates?
Actual wage rates are calculated results in a cost management system, while standard wage rates are prepared in advance for manual calculations in Excel. It is common to use standard (planned) rates, similar to hourly wages for part-time jobs.