Direct Labor Efficiency Standard:
Definition and Explanation:
Setting direct labor time or efficiency standard
means computing the labor time required to complete
a unit of product.
The
establishment of labor time standard or
labor efficiency standard is a specialized
function. Therefore they are usually established by
industrial engineers using time and motion studies.
Standards are set in accordance with scientific
methods and accepted practices. They are based on
actual performance of worker or group of workers
possessing average skill and using average effort
while performing manual operations or working on
machines operating under normal conditions. Time
factors of acceptable level of fatigue, personal
needs, and delays beyond the control of the worker
are studied and included in the standard. such
allowances are an integral part of the labor
standard, but time required for setting up machines,
waiting, or a break down is included in the factory
overhead standard.
The
establishment of time standards require a detailed
study of manufacturing operations. Standards based
on operations should be understood by supervisors
and used to enhance labor efficiency. However, time
standards are of limited use "where operating times
are strongly influenced by factors which cannot be
standardized and controlled by management or where
output from highly mechanized work is a function of
machine time and speed rather than of labor hours
worked."
When a
new product or process is started, the labor
efficiency standard for costing and budget
development should be based on learning curve
phenomenon. The learning curve may well be, at least
in part, an explanation of the labor efficiency
variance associated with employees assigned to
existing tasks that are new to them. Labor related
factory overhead costs and perhaps materials usage
might also be affected.
Example:
Following is an example of the calculation of
standard time required to manufacture a unit of
product:
|
Basic labor time per unit, in
hours |
$1.9 |
|
Allowance for breaks and
personal needs |
0.1 |
|
Allowance for cleanup and
machine downtime |
0.3 |
|
Allowance for rejects |
0.2 |
| |
|
|
Standard rate per direct labor
hour |
2.5 |
| |
|
|
After setting labor
time and rate standards, the standard labor cost per
unit of product can be set. Suppose standard direct
labor rate is $14 per hour, the standard cost per
unit can be computed as follows:
2.5
hours per unit $14 per hour = $35 per unit
| |
Real Business Example:
Industrie Natuzzi SpA, founded and r un by
Pasquale Natuzzi, produces hand made leather
furniture for the world market in Santaeramo
Del Colle in southern Italy. Natuzzi is
export oriented and has about 25% of U.S.
leather furniture market. The company's
furniture is hand made by craftsmen, each of
whom has a computer terminal that is linked
to a sophisticated computer network. The
computer provides precise instructions on
how to accomplish the task. If the craftsman
beats the standard time to complete the
task, the computer adds a bonus to the
craftsman's pay.
The
company's computers know how much thread,
screws, foam leather, labor, and so on. is
required for every model. "Should the price
of Argentinean hides or German dyes rise on
day, employees in Santaeramo enter the new
prices into the computer, and the costs for
all sofas with that leather and those colors
are immediately recalculated. ' every thing
has to be clear for me,' says Natuzzi. 'Why
this penny? Where is it going?'
Source: Richard C. Morias, "A Methodical
Man," Forbes, August 11, 1997, pp. 70 - 72. |
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