How can cost accounting help you manage labor costs?

There are two type of cost , direct or indirect cost . With the help of cost accounting we can allocate the indirect cost which will be helpful to calculate the product cost. Sometimes we calculate product cost to calculate direct cost and ignore to include indirect cost. Overhead cost are those cost which is not directly effect to production but make a contribution indirectly to production like utility bill and building rent etc

The overhead rate is a cost allocated to the production of a product or service. Overhead costs are expenses that are not directly tied to production such as the cost of the corporate office. To allocate overhead costs, an overhead rate is applied to the direct costs tied to production by spreading or allocating the overhead costs based on specific measures. For example, overhead costs may be applied at a set rate based on the number of machine hours or labor hours required for the product.

It helps to compare the budgeted labour cost with the actual labour cost. Through that means you can be able to monitor and control the cost of labour, and ensure that they do not exceed the amount budgeted without any marginal increase in revenue or production output..

Overhead costs are indirect costs that do not vary with every unit. These costs could include factory overheads, equipment charges, utility and rent. An ideal way of doing so is to allocate a set rate. This could be the machine rate or labour rate.

First is to segregate costs into direct and indirect, fixed and variable. In simple words, direct costs could be labour used in manufacturing. Indirect would be shipping, packaging, supervisors and managers. Next is to identify cost drivers and cost centres. These could be manufactured items, services rendered, and departments. If the manufactured item is for multiple projects, the same could also get segregated for projects. Although time-consuming steps, these go a long way in identifying labour efficiency. Furthermore, management can identify high-margin and low-margin items. This information helps make critical strategic decisions, including discontinuation and expansion, determining the scope and areas of cost reduction.

With the help of cost accounting, we can prepare the budgeted cost of production and after producing the product we will prepare the variance analysis and find out under / over applied rate.

Once cost centres and drivers get identified, next up is variance analysis. There are several variances. For instance, labour price and labour hours variance make up labour efficiency. Similarly, material price and material quantity determine material efficiency. There are other aspects, including overhead variances and setup costs. The latter varies as per production runs. When budgeting, one needs to be aware of the flexed budget phenomenon. This accounts for the difference between actual and budgeted production and computes variances. Let us say that the corporation budgeted for 1000 units. The actual production could be 920 units.

As was mentioned earlier, identifying cost drivers is imperative. These could be for manufactured items, services rendered or even departments. A crucial aspect or technique is #ActivityBasedCosting or #ABC. In this case, the activity needs to get identified. It could be packages assembled and order quantities shipped or processed. Regarding the service industry, the activity could be queries resolved by phone (typically #callcentres). Yet another could be technical support (for #IT functions). This segregation helps identify profit margins and cost behaviour, determining the effectiveness of the service rendered. Moreover, it helps make well-informed decisions regarding pricing, product and sales mix.

What cost accounting essentially does is break down all the costs and aspects involved into identifiable bits. This exercise helps determine one more thing - relevant costs. Typically, batch production also has additional considerations, including stepped costs. Now what are stepped costs? Also known as stair-step costs, they are fixed costs that are not directly proportional to activity levels. These remain unchanged up to a certain activity level and increase beyond that level. Let us say that a single piece of equipment can manufacture 5000 units. And the corporation has a requirement to manufacture 6500 units. It could utilize spare machinery within its space. Here, overheads, labour and setup costs would get re-evaluated.