TIME STANDARDS: WHY DETERMINE TIME / JOB?

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1. WHY DETERMINE TIME / JOB?

It is useful to know the direct labor cost / unit, especially when the job is repetitive. Five typical applications are:

1. Cost allocation

2. Production and inventory control

3. Evaluation of alternatives

4. Acceptable day’s work

5. Incentive pay

1.1. Cost Allocation

To determine cost / unit, you need the direct material cost, the direct labor cost, and various miscel- laneous costs (called overhead or burden). Direct labor cost is (direct labor time)(wage cost / hr). So you need to determine how long the job takes. But, in addition, overhead costs usually are allocated as a percentage of direct labor (e.g., overhead is 300% of direct labor cost). So again you need direct labor time. Without good estimates of the cost of production to compare vs. selling price, you don’t know your profit / unit (it may even be negative!). The goal is to improve and control costs through better information.

1.2. Production and Inventory Control

Without time / unit, you can not schedule or staff (i.e., use management information systems). How many people should be assigned to the job? When should production start in order to make the due date and thus avoid stockouts?

1.3. Evaluation of Alternatives

Without time / unit, you can not compare alternatives. Should a mechanic repair a part or replace it with a new one? Is it worthwhile to use a robot that takes 10 seconds to do a task?

1.4. Acceptable Day’s Work

Sam picked 1600 items from the warehouse today—is that good or bad? Supervisors would like to be able to compare actual performance to expected performance. Many applications of standards to repetitive work have shown improvement in output of 30% or more when measured daywork systems are installed in place of nonengineered standards. Output increases about 10% more when a group incentive payment is used and 20% more when an individual incentive is used.

1.5. Incentive Pay

A minority of firms use the pay-by-results (the carrot) approach. If you produce 1% more, you get paid 1% more. This works for the firm because even though direct labor cost / unit stays constant, overhead costs do not increase and thus total cost / unit decreases.

 

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