Question

Indirect costs - Want to be able to see it and add it to product cost…..calculation for expected loss

  • 15 August 2022
  • 2 replies
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Want to be able to see it and add it to product cost…..calculation for expected loss.

We know we can add a burden rate but don't like that idea. We want to track “Unavoidable” Indirect Labor. SAP calls it PF&D (Personal Needs, Fatigue, and Unavoidable Delays). Want to track Unavoidable Indirect Labor and include in standard cost.

Has anyone created a MOD and/or Process for this business requirement?


2 replies

There are many different things happening in a Business and here are some thoughts on things you may have already discussed. I have approached this from a slightly different perspective with the limited question you posted.

 

My first question would be Why? As you state those are Indirect Costs. By Definition that indicates they are Not “Directly” related to the Production costs for the Manufacture of that part.

Next question would be How Often this happens on Every Production Job? and How Much Time is Spent during these Non Production activities? Personal Needs? Is that a way to call needing to use the Restroom Facilities? Is it more common on a Longer Running Operation as you also included Fatigue? Unavoidable Delays - That is Wide Open such as Waiting On Parts to be delivered, Machine Went Down (perhaps that would be under Equipment availability/maintenance), Power Went Out (is that due to Nature, Accident outside hit your transformer). Can the Employee even then record their Indirect Labor as usually sent to other work in the facility if it is a localized event or sent home and HR / Production would clock them out once power is restored for example.

Tracking the Labor reported is easy as you use the Start Indirect Labor process and the employee would select/enter the Code related to why they are not performing the Production/Setup/Rework labor. (Training, Meetings, Clean Up, etc. as you have defined). 

You can then easily pull the data against that table for those codes. 

However adding that to the Standard Cost of a Product is basically opposite of the Standard Cost (Costs Incurred on a Regular Basis during the production process). To keep the math simple let’s say You are adding $100 to the cost of that part for Every Piece that is created for these “Indirect Unknowns”. During a Run of 5 parts that would account for an Indirect Standard of $500. No One during that run charged any Indirect Labor. So when you close the job there are Variances from Standard to Actual and you have a $500 Positive as the Actual Cost of making that part was $100 less for each resulting in a $500 Savings in the Effort to produce. You are then Planning the Cost for EVERYTIME that part is created and must deal with any variances.

 

For the CFO / Controllers / Finance Managers on this Forum - Please chime in on How would you account for that variance?

 

 

I have seen this asked about before in prior companies and the ultimate answer is to work on the Flow and where there are Extra Costs (Hard and Soft) to eliminate the various things that are labeled as Wastes (extra movement (back and forth to the Restroom not during regular breaks), Idle Time (waiting for parts), Research/Questions (Traveler documentation is not clear and need to contact Engineering, etc.) and many other potential Production Interruptions.

 

As a start I would create the Codes. Instruct Employees to Charge the appropriate Code. Run the BAQ to total each over a period of time. Pareto the results and determine if there other ways to eliminate the Unexpected.

As another option you could add another Cost Element to the Costing Structure to utilize, however that requires a few other steps to add to the screens, totals, and of course the Posting Rules. 

 

As I am the first to add my nickel to this - Anyone else have thoughts?

 

Bill

 

Thanks so much for the feedback….I will provide information to my cost accountant.

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