Manufacturers: Not Tracking Direct Labor Costs?
How Do You Even Know What to Charge Clients, or What Kind of Profits You’re Seeing?
A major element in the manufacturing environment too often overlooked is the calculation of direct labor costs that are associated with the manufacturing process. Therein lies the problem: If manufacturers are not tracking direct labor costs, how do they know what to charge clients? Perhaps what’s worse, how do they maintain an acceptable profit margin?
If you operate within the manufacturing sector and have been on the fence about the tracking of direct labor costs, you’ve stumbled upon the right blog. Here, we’re going to explore the reasons why direct labor is not tracked (or not tracked accurately), the importance of tracking labor costs, the components that comprise calculating labor costs and more. By the time we’re finished, you’ll have a much better grasp on direct labor costs and their relationship with the manufacturing process.
The Reasons Why Direct Labor is not Tracked (or Tracked Inaccurately)
In as succinct a way as possible, we’re going to go over the primary reasons why direct labor isn’t always tracked (or tracked inaccurately, in many cases):
- It’s Too Complicated – We hear this all the time; one individual at a company may be running multiple jobs at the same time…so who exactly is allocating the time accordingly?
- Shops Employ the “Guesstimate” Method – While shops may “think” they are tracking labor costs, all they’re doing is guessing.
- Shops Utilize Paper-Based Methods (Which Employees Loathe) – When a paper-based process takes hold, staff will ultimately guess or forget, resulting in inaccurate time logs.
- Shops Don’t Know How to Track Time – So they simply don’t.
The Importance of Tracking Labor Costs
Without tracking labor costs, manufacturing processes suffer in a myriad of ways; here are some examples:
- Overstaffing and understaffing of production lines leads to unnecessary labor costs or delays in production (and thus reduced cash flow).
- Reduced manufacturing throughput.
- Increased maintenance and administrative costs.
- Increased overhead costs that can affect profitability.
To that end, the implementation of tracking labor costs enables organizations to:
- Charge the proper amount for the work performed (eliminates under- or over-charging clients).
- Maintain profit margins.
Components That Make Up Calculating Labor Costs
Direct manufacturing labor costs are associated with the laborers in your shop who work on the goods you’re manufacturing directly; it’s important to measure this cost for a business, as this is essentially a direct measure of how much of your manufacturing costs are going towards paying your laborers. What’s more, knowing this can help when making decisions, especially when analyzing the efficiency of your operations.
The formula is rather simple: You identify all of your direct laborers and then compute their total wages. In so doing, you:
- Determine Who Are Direct Laborers – A good rule of thumb is to count anyone as a direct laborer if they work directly on the product being manufactured.
- Calculate Hours in the Production Process – Next, you should unravel how many hours each direct laborer has invested in the production process from beginning to end; once you determine the total number of hours for each individual worker, simply add the hours to arrive at the total.
- Discover the Total Direct Labor Costs – Here, you take the total number of hours worked and multiply that by the hourly wage.
Make the Entire Process Simple by Integrating Barcoded Time Capture
Through products like Insight Works’ innovative Shop Floor Insight, this entire process that we’ve been talking about can be made uber-simple by integrating barcoded time capture. What does a barcoded time capture solution bring to the table?
- Manual time entry is eliminated with barcode scanning for production orders, jobs, service orders and maintenance.
- Operational data on the shop floor or in the field is captured, including consumption, output, scrap and quality.
- Non-productive and rework time is recorded for advanced reporting.
- Time and attendance is recorded based on employee shifts with exception reporting.
- Achievement of multi-level timecard approval from shop floor or NAV.
- Overtime and shift differentials are automatically calculated for integration with payroll systems.
- Access via web browser enables data entry from mobile devices in the field or the shop floor.
Shop Floor Insight from Insight Works does all this and much more. If you’re ready to get a better handle on labor costs in your manufacturing environment, Insight Works can help and take your operations to hassle-free new heights.