How Does Workloud Use Accurate Product Costing to Manage Direct Labor Costs?
Madison, Wisconsin (PRWEB) May 08, 2014 -- ScheduleSoft’s end-to-end workforce management solution is designed to help your facility run more efficiently, regardless of complexity. Manufacturers are under constant pressure to produce in small batches that replenish only the inventory that has been sold, and demand-driven workforce management is therefore at the core of our product offering. Workloud by ScheduleSoft is the most robust and flexible workforce scheduling solution in the cloud. We provide solutions for HR Management, Facility Management, Demand Planning, Schedule Generation, and Roster Management.
Why do companies struggle with accurate product costing?
A company can use the various facets of our solution to effectively manage and analyze cost and profitability in multiple ways, including improving the accuracy of product costing. Many manufacturers view product costing as the sum of all direct expenses associated with the production of a specific item. These direct costs, as the name implies, follow the exact ebb and flow of materials and efforts used to produce the finished product. If it takes a worker one hour to assemble a product, his hourly wage is considered a direct cost. Costs not directly associated with production, such as building maintenance, utility bills, and employee benefits, are considered indirect costs, which are not be factored into the cost of the product. This count of accounting is commonly referred to as variable costing. To accurately calculate product costs using this traditional costing model, an organization must (1) isolate direct costs from indirect costs, and (2) differentiate and assign the direct costs for each SKU produced.
These tasks pose considerable challenges for an organization, especially when it comes to distinguishing between direct and indirect labor costs. Consider a facility that schedules the same number of employees for each day of the week. While the workforce deployment is static, the facility’s production schedule is not. Some days are simply busier than others. The diagram to the right illustrates a typical week for this facility.
If the first goal is to isolate direct from indirect costs, it is critical for this facility to have visibility into the relationship between each day’s production demands and labor deployment. The organization must recognize and factor in the extra direct labor costs associated with overtime worked on the two busy days (Monday and Tuesday). Although often overlooked scrutinizing the three days that its workforce was less productive is an equally important element of accurate product costing. The labor not directly applied to production on Sunday, Wednesday, and Thursday represents, by strict definition, indirect costs. Whether these incidents of overstaffing were the result of labor union rules, or simply poor planning, they represent a type of overhead cost that, when isolated, can be factored out of direct product costs.
Seeing these kinds of relationships is integral for the organization’s second goal, calculating product costs for each individual SKU. Let us consider, again using the diagram, that the facility devoted a full day to each of their seven products. Although there was less of Thursday’s product made than Friday’s, the actual ratios of direct labor cost to measured output are essentially the same for both days. By contrast, Tuesday’s product output required the partial use of higher overtime wages, thereby making this product’s direct costs higher than either Thursday or Friday’s. Without having this kind of visibility into the each specific SKU’s production details, many facilities simply aggregate production output and labor costs. This would create an average cost per product, which, incidentally, would result in inaccurate costs for every SKU. The higher direct costs associated with Monday and Tuesday’s products are absorbed by the other five SKUs, thereby artificially inflating each of those product costs. Conversely, the Monday and Tuesday SKUs will have artificially deflated product costs. While these approximate calculations may seem rather innocuous on the surface, they can have detrimental effects on retail pricing strategies and profitability. If the two highest-volume products in the example above sell for prices that do not truly cover their actual production costs, the facility may actually lose money each time a consumer buys one of these high-volume SKUs.
What solution does Workloud provide?
The challenge of isolating direct labor costs and differentiating them between products is alleviated through the use of Workloud, ScheduleSoft’s demand-driven workforce scheduling web application. Its core features, explained above, are designed to illuminate and measure the gaps between production demands and labor deployment. Moreover, Workloud’s ability to mirror a facility’s exact finite production schedule allows an organization to precisely match their labor deployment and costs with each individual SKU running on their lines. These sophisticated, exclusive features take Workloud far beyond scheduling automation – it is a powerful cost analysis tool that ensures the long-term profitability and viability of organizations using it.
Yvonne Hangsterfer
Paul Murphy
May 7, 2014
Katherine Ammon, ScheduleSoft Corporation, http://www.workloud.com, 608-807-4586, [email protected]
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