Translating Hourly Labor into Product Costs For Process Improvements

There are a variety of costing systems and methods. Some of which include: standard costing, activity-based costing (ABC), theory of constraints and target cost management. With so many differing approaches, and disagreements regarding how methods should be applied, it is easy to understand how product costing is reprioritized, finding its way to the bottom of our task list.

However, with increasing competitive pressures, product costing is vital to our long-term success. With product costing playing such an important role in the health of our organizations, it is necessary to find techniques for costing that help us understand and make improvements to our processes and cost structures.

Creating simplistic spreadsheets is an easy method for developing basic product costing systems, enabling us to isolate and evaluate costing variables. Perhaps the most difficult and most important variable to incorporate into product costing is hourly labor costs.

There are several contributing factors leading to difficulties in translating hourly labor costs into a product costing format. First, we pay direct labor on an hourly basis; therefore, a typical labor cost is expressed as an hourly cost, not as a per unit cost. Next, it is necessary to track the actual time a laborer works on specific products. This can be difficult, as changing manufacturing schedules require workers to move from one task to another. Finally, product output needs to be measured and matched with the labor hours and hourly labor costs contributed to making the product.

Fortunately, once data collection points are established, entering data into a spreadsheet is the easy part of the process. The exciting part is watching these data sets become real information for process improvements, leading to reduced labor costs.

Click here to download your free basic product costing tool to start understanding your hourly labor costs in relationship to specific products/processes.  Get the information needed to start making incremental process improvements today!