In this task you will establish your initial shop rates for direct labor and manufacturing overhead.
What is the purpose of the Shop Rates screen?
The purpose of the Shop Rates screen is to maintain a single shop hourly rate for direct labor and a single shop hourly rate for manufacturing overhead. The hourly shop rates get applied to work center hourly rates where they can be factored up or down for exceptions.
What are the benefits of the Shop Rates screen?
Self adjusting shop rates are a true DBA innovation. The overall goal of the costing system is for your absorbed costs for labor and manufacturing overhead to offset your actual payroll costs for your production workers and your actual costs for your manufacturing overhead. Many competing systems attempt to tie down their payroll hours with job reported hours. Matching hours to hours is nearly impossible to do and does not lead to more accurate absorbed costs. You run into major problems addressing the following common issues: attempting to track non production time (down time), handling partially attended sequences, accommodating workers that can run more than one sequence at a time, handling labor for rework, the requirement for perfect accuracy of your cycle times, etc.
Instead of worrying about payroll hours, DBA takes your overall costs for a given period of time and compares that to the production hours reported for that same period of time. The strength of our approach is that you do not have to attempt to perfectly match your reported hours with actual clock hours. You can use standard completion hours for reported time and the self adjusting shop rate will automatically adjust accordingly. The end result will be that you will achieve reasonably accurate absorbed labor and manufacturing overhead costs without the need to be perfect in your labor time tracking.
How are shop rates determined?
The two shop rates are calculated using the following formulas from a recent date range of actual costs and reported labor hours. This enables future job labor transactions to be costed at hourly labor and overhead rates that fully absorb your actual costs into work in process, which ultimately flows into inventory value and cost of goods sold.
Actual Direct Labor Costs / Reported Job Hours = Shop Labor Rate
Actual Mfg Overhead Costs / Reported Job Hours = Ship Overhead Rate
Manual entry is required to get started
During system implementation you do not yet have any job hours history to make the above calculations, so your initial shop rates must be entered manually as described below.
Shop Rates
(BOM – Shop Rates)
Establishing Shop Rates
The Shop Rates screen is used to establish and maintain hourly shop rates for direct labor and manufacturing overhead that are the basis for work center hourly rates. After you activate the system and begin accumulating job labor history, suggested rates are calculated for you based on past history. During implementation, however, you have no job labor history and will therefore enter initial shop rates manually by taking the following steps.
Step 1 - Manually enter New Labor Rate
Enter an hourly rate in the New Labor Rate field based on your best-guess estimate of the average hourly wage rate paid to your direct labor work force, adjusted upward by a percentage to account for benefits and taxes. This will provide a sound basis for a starting rate that will get refined over time as you start to accumulate labor hours history.
Step 2 – Manually enter New Overhead Rate
Enter an hourly rate in the New Overhead Rate field that ratios the hourly labor rate by the same approximate ratio of total labor cost to total manufacturing overhead cost in your general ledger.
For example, if you examine past costs in the general ledger and you determine that total manufacturing overhead costs are approximately twice your total direct labor costs, then multiply the New Labor Rate by two to establish the New Overhead Rate.
If you do not have sufficient GL data to determine the cost ratio between direct labor and manufacturing overhead, make a best guess estimate that will get refined over time as you accumulate labor and overhead costs and reported hours. It is not uncommon for manufacturing overhead costs to be two or three times direct labor cost.
Step 3 – Apply hourly rates to your work centers
Click the Save button to save the new rates and apply them to your work centers.
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