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Distribution of labor in cost calculation and cost calculation

Distribution of labor in cost calculation and cost calculation

When calculating the cost it is always important to correctly allocate labor costs by economic elements, especially when it comes to calculating it by product type. This distribution gives an understanding of how much labor resources are actually spent on the production of a particular product/service.

As we know, the calculation cost was originally built on the principles of collecting all costs, and then distributing them by type of products/services and dividing them by their corresponding amount, which is essentially called cost calculation.

It is also important to understand the need to divide such costs into variable and constant, from the point of view of management accounting.

When including wages in costs, it is initially necessary to distribute all employees involved in the production process into 3 groups:

  • 1st - those that will be included in direct variable costs
  • 2nd - those that will be included in direct fixed costs
  • 3rd - those that will be included in the indirect costs

Echoing the third group, this is, in fact, overhead labor costs, the reduction of which (per unit of production) will depend on the productivity of the main workers (the first group), which is directly related to scale effect.

To understand the basic essence and principle of the distribution of labor costs in the cost calculation process, let's give a simple example.

this is important

There is an organization that produces 3 types of goods, for example, bed linen.

  • One and a half set of underwear
  • Double linen set
  • Euro linen set

remuneration in cost of production in the calculated example - 1

Let's estimate the labor costs by product type for 30 days of the organization's work (month).

There are 3 categories of workers involved in the production process:

1 pieceworkers are those who directly participate in the technological process and the output of these types of products directly depends on their work. I usually refer to this category as core employees.

For our case, these are 3 professions:

  • Seamstress
  • The cutter
  • Packer

These costs are directly variable in the cost calculation process.

2 timers are those who indirectly participate in the production process. I carry out to a greater extent the fiction of the organizational and production plan.

For our case, these are 2 professions:

  • Equipment adjuster
  • Shop foreman

These costs in the cost calculation process relate to direct constants.

3 timekeepers are those who indirectly participate in the production process. So to speak, the administrative and managerial staff.

For our case, these are 2 professions:

  • Accountant-economist
  • Director

These costs in the cost calculation process relate to indirect costs.

Direct variable labor costs

Now it is necessary to determine labor rates for employees whose wages will directly depend on the volume of products produced.

remuneration in the cost of production in the calculated example - 2

Each type of product has its own tariff/price.

These prices are set based on the physical ability of the employee to perform these operations and the time spent, human working conditions, shift/work schedule and the average monthly salary level for this profession. Based on these criteria, the total need for the number of employees to fulfill the planned production program is determined, taking into account its possible overfulfilling, as well as production capacities.

According to what principle labor rates are derived, for a specific example, by product type, you can see here.

These prices are automatically included in the cost price as direct variable costs for each relevant product to which they relate.

remuneration in cost of production in the calculated example - 3

remuneration in the cost of production in the calculated example is 4

remuneration in the cost of production in the calculated example is 5

Direct permanent labor costs

We will set prices for an hour of work for timers, which will relate to direct fixed costs.

The size of the prices in this case depends more on the professional abilities of the employees and their real benefits for improving the efficiency of their activities.

remuneration in the cost of production in the calculated example is 6

After the set hourly rates, we will determine the total number of hours that each employee will work for the entire period (a month in our case) and then we will distribute these hours by type of product, depending on how much time each working unit will spend on each type of product.

With the complexity of the allocation of the hourly fund, a conditional distribution base is used (maybe even in proportion to the volume of output).

We will distribute the entire working fund of each of these workers in 123 hours in equal parts for each type of product, i.e. 41 hours (123/3). When calculating, these hours/labor costs in money will be divided by the volume of output of the corresponding product.

remuneration in the cost of production in the calculated example is 7

remuneration in the cost of production in the calculated example is 8

remuneration in the cost of production in the calculated example is 9

Indirect labor costs

We will set prices for an hour of work for timers, which will relate to indirect costs.

remuneration in the cost of production in the calculated example is 10

These costs are not allocated directly by product type. Their total monthly working fund, when calculated, will be automatically distributed in accordance with a certain base for the distribution of total overhead costs, which is adopted by the accounting policy of the organization.

remuneration in the cost of production in the calculated example is 11

Usually, the volume of output in sales prices, variable costs, total direct costs, etc. act as such a base for the distribution of indirect costs.

As a result, in the process of setting the initial prices of employees of the piecework wage system and direct (by type of product) and indirect distribution of the working time fund of timers, a summary cost estimate and cost calculation for each type of product are calculated.

Distribution of labor costs in calculations and cost estimates by product type

Total cost estimates by types, directions of labor costs

This is the principle by which labor costs are distributed when calculating and calculating the cost, which allows you to objectively and correctly determine the costs of a particular product in the process of its pricing.

You can distribute and take into account all the labor costs of your business using this online calculator.

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