Other Uses For Labor Standards
Feb 19, 2015
I was reading an article recently wherein the author was discussing alternative uses for direct labor standards. I think we all know that direct labor standards, computed correctly, can be used to value product for inventory purposes. Less realize they are also very useful in determining profitability by product, customer, or product line. Furthermore, labor standards are an efficient way to gain productivity with the labor force and to control production is through the computation of labor variances and comparing those to accurately computed standards.
However, none of these subjects were the focus of this particular article, but rather the author was attempting to point out other uses for accurate labor standards in the arena of budgeting and staffing. His main point on the budgeting process was that if production activity can be reasonably forecasted with levels of production accurate within a narrow range, then labor standards are useful or can be useful for the purpose of determining what the direct labor budget should be for that level of activity. In other words, what he really is referring to is what I would call a flexible budget for a manufacturing company. Meaning that all of the variable costs float with levels of activity and rather than budgeting to a fixed dollar amount, the management team is budgeting to a relationship that is known to be productive. In this scenario, direct labor should only represent X percentage of total goods produced. A flexible budget can be useful in times of varying levels of production in setting and maintaining reasonable goals for the management team.
I believe it is obvious that if your labor standards are accurate they can provide a reasonable framework for setting your flexible budget as you’re planning your years’ activities.
The other point that I believe the author was attempting to make was that labor standards also have a use for forecasting crew sizes in a short-term timeframe. For instance, in this case, the author was suggesting that accurate labor standards would be useful in setting crew sizes a week in advance. The goal would be to extend the labor standards by the anticipated levels of production and in effect back into the direct labor required to meet that level of production. In many cases, direct labor standards cannot be used to determine crew sizes with different specialties, but can be useful in determining overall labor cost. However, if the standards were developed with anticipated crew sizes in mind, then those anticipated crew sizes could provide the foundation for segregating total labor requirements into the various components necessary to staff the operation.
The author thought that such labor standards would be helpful in anticipating hiring needs and reducing turnover among the labor force and of course forecasting cash flow requirements for payroll needs. All of those are reasonable expectations from an accurately operating costing system with reasonably accurate labor standards.
Categories: Cost Accounting