What Happened to Direct Labor - an Article Critique

Topics: Manufacturing, Cost accounting, Costs Pages: 5 (1632 words) Published: July 15, 2013
What Happened to Direct Labor

An Article Critique
Presented to the
Accountancy Department
De La Salle University

In partial fulfillment
Of the course requirements

Dr. Merlinda Bucad

Hipolito, Chelsea Marie Y.

July 15, 2013


What Happened To Direct Labor
Posted on May 9, 2013 by Bill Horst, CPA, CMA, CGMA
Costing For Profitability http://costingblog.wvco.com/2013/05/09/what-happened-to-direct-labor/

One of the topics that come up frequently at our cost forums is related to the best method of allocating overhead to production. In years gone by, direct labor was frequently the best choice for doing such allocations. But more recently, direct labor is less and less likely to be the best choice. What’s happened to direct labor? The explanation is really quite simple. As American manufacturers came under increasing pressures related to keeping down costs, they were forced to turn to automation and technology to improve production efficiencies and reduce the overall cost per part. Raw material prices are often subject to changes in market price with little or no control as it relates to market-driven prices on such commodities. However, management does exert substantial control over how much labor and overhead is incurred to produce parts. In the early days of my career it was not uncommon for my manufacturing clients to have 25% of the cost of goods sold associated with raw material, another 25% or more associated with direct labor, and then someplace around the neighborhood of 10-20% associated with overhead. As technology advanced in the manufacturing area, and more and more manufacturers came under pressure to reduce cost, those numbers have changed dramatically and today I find that raw material cost might be in the neighborhood of 50% of the cost of goods sold with direct labor being in the neighborhood of 10-15% with overhead making up another 15-20%. What this means is that direct labor is no longer a controlling part of the cost of manufacturing a part. As automation has taken over more and more manufacturing operations, we frequently find that labor is just an overhead associated with running the highly automated manufacturing process. Things like insurance, utilities, and maintenance are not that much different than labor as it relates to maintaining the machine and keeping it operating at full production. Therefore, if the amount of labor is ever diminishing as it relates to the total cost of the part, it most likely is no longer the best choice for allocating overhead. I do not mean to imply that there are not ANY labor-controlled operations anymore, certainly there are. For those operations it is appropriate and very likely that the apportionment base is calculated based on either direct labor hours or dollars. For most operations in a highly automated manufacturing environment, the only real choice most likely is machine hours. Reality is that just because it was done this way in the past, doesn’t make it the best choice today and in every case an analysis needs to be done to be sure that you are considering differing apportioning bases for the allocation of overhead to production.

Article Critique:

The article “What Happened to Direct Labor” written by Bill Horst, CPA, CMA, CGMA contains a quite moving topic. The article is basically about how the factor Direct Labor in the costing of products in a manufacturing company is slowly diminishing as technology advances continues to aid companies in production. The author mentioned that in his early times, a significant portion of the cost is allocated from the labor applied in manufacturing the finished product, but as modern times progress, more and more companies turn to automation to increase efficiency and reduce cost of each unit of product. Increase efficiency as in lessen the risks of committing mistakes or...
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