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Home Standard Costing and Variance Analysis Direct Labor Efficiency Standard
 
 

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.

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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