Direct costs operating labor

The manufacturing cost consists of direct, indirect, distribution, and fixed costs. Direct costs are raw materials, operating labor, production supervision, utihties, suppHes, repair, and maintenance. Typical indirect costs include payroll overhead, quaHty control, storage, royalties, and plant overhead, eg, safety, protection, personnel, services, yard, waste, environmental control, and other plant categories. However, environmental control costs are frequendy set up as a separate account and calculated direcdy. The principal distribution costs are packaging and shipping. Fixed costs, which are insensitive to production level, include depreciation, property taxes, rents, insurance, and, in some cases, interest expense. 

Problems can also arise when allocating overheads on the basis of direct labor cost. Let us consider a company that evaluates overheads at 125 percent of direct labor cost. A process plant employs seven operators, each with a direct cost of 10,000 per budget period. As a result of a works-study exercise, it is found that the plant can operate satisfactorily with six operators. The ac tual cost saving is hkely to oe far nearer to the direct labor savings of 10,000 per period than to the calculated saving of 10,000 -t- 10,000(125/100) = 22,500 per period. The 22,500 calculated saving is the direct labor cost plus overheads taken as 125 percent of the direct labor cost. 

Direct Manufacturing Costs Direct manufacturing costs include raw materials, operating labor, utihties, and some miscellaneous items. A summary of the characteristics of each follows. 

Miscellaneous Direct Costs Estimates for the cost of maintenance and repairs, operating supplies, royalties, and patents are best based on company records for similar processes. A rough average value for the annual cost of maintenance is 6 percent of the capital cost of the plant. This percentage can vaiy from 2 to 10 percent, depending on the severity of plant operation. Approximately half of the maintenance costs are for materials and half for labor. Royalty and patents costs are in the order of 1 to 5 percent of the sales price of the product. 

Performance and Cost Data for Turbo-Tray Dryers Performance data for three apphcations of closed-circuit diying are included in Table 12-29. Operating, labor, and maintenance costs compare favorably with those of direct-heat rotating eqmpment. 

Operating costs include the costs of raw materials, direct operating labor, labor supervision, maintenance, plant supplies, utilities (steam, gas, electricity, fuel), property taxes, and insurance. Sometimes certain operating cost components are directly expressed as a fraction of the capital investment cost. Table B.3 is a brief checklist... 

An evaluation of the operating labor and utilities requirements of the process must be made before the total product cost can be estimated. Details for evaluating these direct production costs are given in Chap. 6 and Appendix B. The estimate of the total product cost for the manufacture of 15 million lb per year detergent, based on methods outlined in Chap. 6, is presented in Table 5. 

Direct production costs include expenses directly associated with the manufacturing operation. This type of cost involves expenditures for raw materials (including transportation, unloading, etc.,) direct operating labor supervisory and clerical labor directly connected with the manufacturing operation plant maintenance and repairs operating supplies power utilities royalties and catalysts. 

A certain amount of direct supervisory and clerical labor is always required for a manufacturing operation. The necessary amount of this type of labor is closely related to the total amount of operating labor, complexity of the operation, and product quality standards. The cost for direct supervisory and clerical labor averages about 15 percent of the cost for operating labor. For reduced capacities, supervision usually remains fixed at the MO-percent-capacity rate. 

These charges are closely related to the costs for all labor directly connected with the production operation. The plant-overhead cost for chemical plants is about 50 to 70 percent of the total expense for operating labor, supervision, and maintenance. 

The total product cost per unit of time may be divided into the two classifications of operating costs and organization costs. Operating costs depend on the rate of production and include expenses for direct labor, raw materials, power, heat, supplies and similar items which are a function of the amount of material produced. Organization costs are due to expenses for directive personnel, physical equipment, and other services or facilities which must be maintained irrespective of the amount of material produced. Organization costs are independent of the rate of production. 

Chemical plants require several types of labor. There is direct labor, consisting of operating labor to produce a chemical, and maintenance labor to maintain the process. There is also indirect labor, needed to operate and maintain facilities and services. Happel and Jordan [6] have pointed out that the contribution of labor costs to the product cost is small. But labor cost contributes to the cost of several oftier items, as shown in Table 2.1. When developing a new process, we can estimate the niunber of operators by visualizing the operations for the various... 

Plant overhead is the cost of operating the services and facilities required by the productive unit, as listed in Figure 2.3. Also included in this category are all the fringe benefits for direct as well as for indirect labor. It is common practice to include the fringe benefits of direct labor in the overhead rather than in direct costs. 

I. Direct costs (recurring and nonrecurring) Manufacturing site costs Capital investment, operating and maintenance costs, labor, raw materials, and waste disposal costs... 

Up to this point in this chapter, we have presented what is called traditional cost/managerial accounting. The traditional methods have helped finance departments monitor operations and value inventory, but some people feel that rather than providing accurate picture of a company s costs, this approach focused on direct costs and relied on arbitrary cost allocations such as labor-based overhead rates. 

---