Set your routing sequence Hours Type to Standard for improved throughput and costing.
BOM Routing Hours Type
This setting determines how labor hours for this sequence are to be processed. Two options are available
Standard (Recommended)
With this option, actual labor hours are not collected. Instead, standard hours from the job routing specifications are used for job costing purposes, based on completion quantities or finished status entered in the Job Labor screen.
Use Standard hours for partially attended processes
Some work center machines can be started and run without the need for a worker to be present the entire time. To handle this scenario, the cycle time should be for the complete run time for the process. You can adjust the labor costing using the Labor Cost Factor in the BOM > Work Center > Details tab. For example, if the work center process is attended 20% of the time you can set the Work Center Labor Cost Factor to .20 and the Mfg OH Factor to 1. The costing will adjust the absorbed labor rate and leave the mfg overhead rate fully intact.
Use Standard hours for work center processes that require a team of workers
Some work centers require a fixed team size to perform a process. To handle this scenario, the cycle time should be for the complete run time for the process. You can adjust the Labor Cost Factor in the BOM > Work Center > Details tab to adjust the labor cost rate to reflect the team. For example, if the process requires a team of 2 workers, you can set the Labor Cost Factor to 2 and you can optionally set the Mfg OH Factor to either 1 or 2.
Actual (Use Sparingly)
With this option, actual worker hours are to be collected against this sequence and entered in the Job Labor screen.
Special Warning Regarding Actual Hours
Our experience has shown that it is very difficult to perform actual hours in most manufacturing environments. The reality of most shops are that once an item is finished it is shipped out as soon as possible regardless of whether all of the costing information has been submitted. It is very easy to make errors or omissions in labor entry that can have a very consequential effect on your cost of sales accounts and make your income statement a challenge to interpret. Since the product is likely already out the door, there is not an opportunity to fix the costs after the fact. We strongly recommend Standard hours completions for most companies
Standard hours are recommended for improved throughput and consistent costing
When the Standard hours type is used against job sequences, labor can be quickly updated in just a few clicks because standard setup and labor hours are applied instead of actual hours. Using standard hours eliminates all the mechanical processes that are required to collect and report actual labor hours. Our recommendation is to use Standard hour sequences and commit to reporting completions when sequences are finished.
Are Actual Hours more accurate for costing?
Because actual hour reporting is time consuming, bureaucratic, and prone to timing errors, it is our experience that Actual Hours tracking can lead to frequent unintended costing errors. These errors can undermine the basic goal to reasonably reflect the cost of labor and manufacturing overhead in the value of the products you manufacture. Standard completions for costing can lead to a more stable inventory value and cost of goods sold.
Self-adjusting Shop Rates improves Standard completions costing
Even if your Standard hours completions do not perfectly tie down to actual clock hours reported, the shop rate calculation will automatically take this into account and the rates will adjust accordingly. For example, if you under reported time based on completions, in the shop rate screen it will look at your labor costs and manufacturing overhead costs for a period of time versus the hours reported in DBA for that same period. If hours are under-reported versus reality, then the shop rate for labor and manufacturing overhead would automatically increase to compensate. Because of self-adjusting shop rates, you can achieve very reliable absorption costing with standard completions that are just reasonably "ballpark" accurate.
