Standard Cost for Direct Labour | Meaning | Fixed standards

What is Standard cost for direct labor?

The time required for producing a product should be ascertained and labor should be properly graded. The reason is that all the workers are not having equal efficiency. Hence, there is a need of fixing standard time for each job. The wages are also paid only on the basis of efficiency of labor. Hence, there is a need of fixing standard wage rate. The time spent by different grades of workers for manufacturing a product should also be studied for calculating standard cost for direct labor.

Fixed standards for direct labor

In other words, the fixing of standard cost for direct labor is required to decide

  1. Standard time and
  2. Standard wage rate.

Standard Time

It is the time taken by the different grades of labor for performing a particular job. Standard time is fixed for each job separately. But, the principles followed for setting of standard time is uniform.

The following factors are taken into consideration for fixing of standard time.

  1. Past experience.
  2. Test run result.
  3. Time study.
  4. Motion study.
  5. Technical estimate
  6. Experience of similar concern.
  7. Working condition.
  8. Quality of product.
  9. Compliance of legal provisions.
  10. Tools and equipment used.
  11. Plant efficiency.
  12. Efficiency and skill of the workers.
  13. The extent of supervision applied.
  14. Working environment.
  15. Fatigue study.

The standard time should be revised at regular intervals by taking into account of technical developments or otherwise.

Standard Wage Rate

Standard wage rate refers to the expected wage rates to be paid for different categories of workers.

The following factors are considered while fixing standard wage rate.

  1. Type of labor required.
  2. Efficiency of the labor. i.e. skilled, semi-skilled and unskilled.
  3. Area of the job i.e. Technical and non-technical.
  4. Past experience.
  5. Demand and supply in the labor market.
  6. Payment made by similar concerns.
  7. Trends in wage increase.
  8. Urgency of the job performance.
  9. Bargaining of the specific labor.
  10. Agreement made with the labor.
  11. Agreement made with the labor union.
  12. Expected or anticipated labor rate changes.
  13. Bonus payable.
  14. Fringe benefits payable.

The standard wage rate may be time or piece rate depending upon the system of wage payment employed in an organization.

Idle Time Standard

It should also be fixed as to how many hours may be wasted by a laborer in a particular period. In this regard, unnecessary motions should be eliminated. The causes of idle time are presented below.

  1. Power failure.
  2. Machine breakdown.
  3. Poor planning of production schedule.
  4. Poor planning of work of supervisor.
  5. Lack of adequate material.
  6. Change in the production process or technique.
  7. Strikes.
  8. Lockouts.
  9. Tea Break.
  10. Time interval between one job and another.
  11. Time for tool setting.
  12. Adjustment of machine.

Physical Standard

The term physical standard is used both for direct material quantity standard and direct labor time standard. The primary objectives of setting physical standards are given below.

  • Economy in Production.
  • Estimation of standard production cost. If so, selling price is determined well in advance.

Generally, the physical standard is determined only by the Industrial Engineering Department in a manufacturing concern. The standard must be fixed in terms of specific units i.e. units of time, raw materials in kg or litre, hours of plant capacity and the like. This is required for easy comparison of actual happenings on physical units. The deviations are find out and reported only by the cost accountant even though he is not connected with the setting of physical standard. He should be very careful while finding the deviations. He should frame a clear cut procedure for the inspection of physical standards for materials and components. If not so, he is not in a position to report the deviations to the top management. Moreover, he should be informed well in advance if there is any change in the physical standard. This will help him in revising his cost sheet at the earliest.