How to Calculate Labor Cost

Direct Labor Cost• Important to calculate direct labor cost:Calculate direct labour cost per hour Calculate direct labour cost per item

•• Direct Labour Cost per hour• Employee Working hrs Salary Pm

Pm • A( Skilled Tailor) 208 3100.00• B( Skilled Tailor) 208 3100.00• C( SS Tailor)208 2500.00• D(Folder,Iron) 208 2900.00•

• 832 11600.00•

• Labour Cost 11600/832 Rs 14/hour

Direct labor

• Any work that alters the composition,condition,conformation or construction of a product

• Any operation that advances a product towards its ultimate condition for sale thereby adding to its value

Direct labour cost

• Remuneration paid to employees who make the garment-cutters,machinists,pressers etc.

• 2 options of remuneration: Time based wages(Hrs worked* Wage rate per

hour) Piece rates(Pieces produced*rate per piece)

Piece Rates

• Often difficult to set• Involve work study techniques to measure

time taken to perform an operation.• Problems associated with Piece rate systems

Who sets the rates?

• Minimum wage laws• In India differ for every state

Minimum Wage rate--Delhi

• Textile Industry including Hosiery Handloom, Niwar, Lace, Thread Ball Mfg. Name Label, Dyeing, printing of Textile & readymade Garment.

• Skilled ---------------248 • Semi-Skilled------- 225 • Unskilled----------- 203

Minimum Wage rate--Haryana

• Ready made Garments:• Highly skilled -------192.23 • Skilled B-------------- 187.23 • Skilled A --------------182.23 • Semi skilled B------- 177.23 • Semi skilled A------- 172.23 • Unskilled------------- 167.23

Minimum Wage rate--Gujarat

Manufacturing Readymade Garments or its Accessories & Tailoring Establishments more than three workers:

• Category V------ 163.9 • Category IV ------166.1 • Category III-------167.5 • Category II-------- 169.7 • Category I ------- 171.7

Minimum Wage rate--Rajasthan

• Tailoring work & Garments Industry:

• Skilled 155

• Semi-Skilled 145

• Unskilled 135

Minimum Wage rate--Himachal

• Establishments with manufacturing Process as defined in clause (K) of section-2 of Factories Act, 1948:

• Highly Skilled------- 144 • Skilled---------------- 135.25 • Semi-Skilled-------- 126.55 • Un-Skilled----------- 120

Piece rate calculation

• If operation A takes .75minutes and the rate per SAM is Rs .042 and operator produces 4850 pieces in a week then the weekly earning of this operator=Rs

Labor Costing-Budgeted

• Basis for labor costing is time.• Labor costs-Direct & Indirect need to be budgeted

for a firm to examine it’s financial commitments & evaluate its capacity to produce a product.

• Total DLC=No.Of Operators*hours /week* weeks/year*avg hourly earnings.

• This rep the firm’s financial commitment to employing a pre determined no.of operators for specific time period.

Labor Costing-Budgeted• Calculated to establish Budgets, schedule work and hire

employees.• DLC=Std LC+Excess LC• Std LC-Money earned to produce the product/piece rate

earnings.• Std LC=% Plant efficiency*No. Of work hours*weighted

average base rate.• Std LC is needed to determine the cost of producing each

style & excess cost of each style. • Based on plant efficiency and weighted average base rate.

Labor Costing-Budgeted

• Plant efficiency is Volume of production relative to the input of work hours.Based on operational history of plant.

• Base rate is established compensation for one hour of work.May vary for skilled operators.

• Excess labor cost=Compensation for time spent on the job but not producing a product.

• It is the difference between total earned and total paid to direct employees.

Labor Costing-Individual Style

• Begins with a breakdown of all operations involved in assembling a style.

• The style can be broken into component parts and sub totaled or the production standards for each operation can be added together for the total garment.

• Production standard reflects the normal time required to complete one operation using a specified method that will produce expected quality.

Labor Costing- Individual Style

• Prodn standards are the basis of establishing standard labor costs and managing available production time.

• Time values specified in production standards are referred to as SAM/SAH.

• Prodn time is converted into Re/$ by determining the value of each minute.

Dependency of Direct Labor Cost

• Fashion vs Staple MerchandiseMarker Making costs affected byVariations in width of piece goodsFabric design

Spreading Costs

• Type of Fabric spread• Length of spread • Consistency of fabric• Spreaders attention to fabric defects• Complexity of spread

Cutting Costs

• Pattern Configuration• Die cutting requirements• Fabric type• Fabric design• Spread Height

Assembly/Bundling

• Amount of SKU’s involved• Bundle integration• Bundling specifications required

Sewing Operations

• Size of sewing bundles• Size and color variations• Variations in fabrics• Utilisation of Equipment• Quality Specifications

Pros & Cons of Piece Rate System

• Advantages- Labour can be hired on need basis Avoids union activities Can be fired if performance is not of expected

level Mfger doesn’t have to spend on training

• Dis-advantages Workers work at their own free will Slow workers are not able to earn as much Mfger might not find the best workers specially during season To earn more workers might produce inferior quality- Every time a mfger hires, there needs to be price negotiation.• Operators not responsible for upkeep of machines and

equipments• elaborate records need to be kept of pcs produced.

Working Hours & Overtime Rates

– Section 51-Weekly Hours– No adult worker shall be required or allowed to

work in a factory for more than forty eight hours in any week.

– Section 54-Daily hours– No adult worker will be required or allowed to

work in a factory for more than nine hours in any day

• Section 59-Where a worker works in a factory for more than nine hours a day or for more than 48 hours a week, he shall in respect of overtime work be entitled to wages at the rate of twice his ordinary rates of wages

• Workers in a factory who are paid on piece rate basis, the time rate shall be deemed equivalent to the daily average of their full time earnings for the days on which they actually worked on the same or identical job during the month immediately preceding the calendar month during which the overtime work was done.

Cost Centers

• Departments of the factory for which costs can be identified.

• Production Cost Centers• Service cost centers• Within service cost centers all costs are

overhead costs• Hence these costs have to be allocated to the

products.

Cost Centers-Advantages

• The entire factory is divided into smaller depts.

• Each dept. hence is accountable for cost control

• Allows costs to be ‘appropriately’ distributed

• ABC mfging company has the following estimates:

Production Cost Centers(PCC):Cutting Sewing Finish &

packDL hrs 740 2000 760O/H-Indirect L 100 250 150Others 80 150 120Service Cost Centers(SCC):

HR Dept Maintenance DeptIndirect L 2500 2000Others 300 700

• SCC are shared out to PCC on based on-Factory Personnel-in proportion of estimated DL

hrs.Maintenance-half to sewing room,remainder

equally divided between cutting and press rooms

Work centre rateWORK CENTER COST FOR 100 FICILITY

Unit W/Center Costing Comp. Description DateStd.Cost/Per

Hour Remarks1 Cutting OT B08 Wages+Incent 1/6/2007 27.95 P/Hour

  Cutting   Total Cost 1/6/2007 94.93 90 People

  Cutting   Total Cost      

             

  Embroidery OT B08 Wages+Incent 1/6/2007 31.72 P/Hour

  Embroidery   Total Cost 1/6/2007 42.27 P/Hour -P/Head

             

  Finishing OT B08 Wages+Incent 1/6/2007 31.5 P/Hour

  Finishing   Total Cost 1/6/2007 79.71 P/Hour

             

  Sewing OT B08 Wages+Incent 1/6/2007 29.43 P/Hour

  Sewing   Total Cost 1/6/2007 56.69P/Hour -

P/Machine

             

  Washing OT B08 Wages+Incent 1/6/2007 34.03 P/Hour

  Washing   Total Cost 1/6/2007 35.37 P/KG Hour

             

  Dressing OT B08 Wages+Incent 1/6/2007 27.79 P/Hour

  Dressing   Total Cost 1/6/2007 68.8 P/KG Hour

             

W/Center

DateBLR Units

UNIT- 1UNIT-4, 9 & 10

UNIT-6 & 8

UNIT-7UNIT 11

KnitUNIT 12

KnitUNIT 14 UNIT 16 UNIT17 UNIT19

Cutting OT 1/6/2007 75.62 19.98 20.11 19.72 27.73 27.73 20.15 19.87 - -

Cutting 1/6/2007 67.70 83.46 90.81 54.76 33.82 33.82 74.25 84.22 75.20 43.27

       

Embroidery OT 1/6/2007

- - 20.00 20.00 - 36.74 - - - -

Embroidery 1/6/2007

- - 7.20 7.20 - 14.04 - - - -

       

Finishing OT 1/6/2007 19.64 19.77 19.80 19.71 35.22 35.22 19.72 17.76 53.04 -

Finishing 1/6/2007 63.66 48.00 52.92 56.40 41.31 41.31 58.77 33.95 55.67 55.57

       

Sewing OT 1/6/2007 19.85 19.83 19.85 19.82 30.24 30.24 19.84 19.84 19.84 -

Sewing 1/6/2007 49.42 62.89 45.36 56.89 48.47 48.47 55.26 48.77 49.25 49.24

       

Washing OT 1/6/2007

- - - 19.14 - - - - - -

Washing 1/6/2007

- - - 3.00 - - - - - - Dry Process OT 1/6/2007    

Dry Process 1/6/2007

- - - 29.40 - - - - - -