(BOM – Shop Rates)
Screen Details - Legacy Financials
These screen details apply when you are using the Legacy Financials accounting configuration.
Overview
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
Actual cost totals are derived from earmarked accounts
The actual costs used in the above formulas are derived from general ledger Cost of Sales accounts that are earmarked for Direct Labor or Mfg Overhead on the Setup tab.
We recommend quarterly updating
We recommend updating shop rates once a quarter. If you recently implemented DBA and are still refining your numbers, you may wish to update shop rates more frequently, such as each accounting period, until they stabilize.
Variances are normal and expected
Because hourly shop rates are a prediction of future costs and hours, there will always be an accounting variance between absorbed costs and your actual labor and overhead costs. Such variances are normal and expected and are automatically handled by the accounting system.
Advance Setup
When you first launch this screen, you are prompted to go to the Setup tab (see below) so that you can identify your direct labor and manufacturing overhead GL accounts.
Your payroll system must isolate production workers and indirect labor
Your payroll system cost account assignments must isolate costa for production workers, which are direct labor costs, from indirect labor costs for shop managers and non-production workers, which are manufacturing overhead costs. Follow these guidelines:
Direct Labor Payroll Accounts (Production Workers)
In your payroll system, isolate payroll costs associated with your direct labor employees (production workers) and post them to these accounts. In some payroll systems you can assign employees to groups and then assign cost accounts to the group. In QuickBooks payroll, you can use payroll items to represent payroll cost categories and assign cost accounts to those items.
54100 Labor Payroll - Benefits
54200 Labor Payroll - Taxes
54300 Labor Payroll – Wages
Indirect Labor Payroll Accounts (Managers and Non-Production Workers)
In your payroll system, isolate payroll costs associated with your indirect manufacturing labor (shop management, shop supervisors, and shipping, receiving, warehouse, inspection, and maintenance personnel) and post them to these accounts. In some payroll systems you can assign employees to groups and then assign cost accounts to the group. In QuickBooks payroll, you can use payroll items to represent payroll cost categories and assign cost accounts to those items.
59000 Indirect Payroll - Benefits
59100 Indirect Payroll - Taxes
59200 Indirect Payroll - Wages
Calculator Tab
Date Range
From Date, Thru Date
Each time you launch this screen, you are prompted to select a date range, which is displayed in this panel. The past three months are selected by default, but you can select any range of dates. The date range determines the costs and hours used in the shop rate calculations.
CAUTION: Do not select mid-month dates or a date range shorter than three months. Avoid mid-month dates because you can understate your overhead costs if some monthly costs have not yet been booked. Avoid short date ranges because the inclusion or exclusion of one payroll run can significantly overstate or understate your direct labor cost.
Direct Labor
Labor Cost
The program displays your total actual cost for direct labor within the specified date range. This cost is extracted from the Direct Labor accounts selected on the Setup tab. You can click the search icon at right to get a listing of the underlying transactions behind this amount.
Edit Labor Cost Option
During system startup, no cost history has yet accumulated in the general ledger, in which case you can obtain your total direct labor cost for this date range from your old accounting system and then click the Edit Labor Cost button at right to enter that cost, which overrides the calculated cost.
Absorbed Labor
This is your total absorbed cost for direct labor within this date range. This cost is extracted from your Absorbed Labor account in the DBA general ledger. You can click the search icon at right to get a listing of the underlying transactions behind this amount.
Variance %
This is the variance between direct labor cost and its absorbed cost, expressed as a percentage. If direct labor cost exceeds its absorbed cost, this is a positive percentage, which means that direct labor cost was under-absorbed. If direct labor cost is less than its absorbed cost, this is a negative percentage, which means that direct labor cost was over-absorbed. You can click the magnifying glass icon at right to see the actual calculation.
Mfg Overhead
Overhead Cost
The program displays your total actual cost for manufacturing overhead within the specified date range. This cost is extracted from the Mfg Overhead accounts selected on the Setup tab. You can click the search icon at right to get a listing of the underlying transactions behind this amount.
Edit Overhead Cost Option
During system startup, no cost history has yet accumulated in the general ledger, in which case you can obtain your total manufacturing overhead cost for this date range from your old accounting system and then click the Edit Overhead Cost button at right to enter that cost, which overrides the calculated cost.
Absorbed Overhead
This is your total absorbed cost for manufacturing overhead within this date range. This cost is extracted from the Absorbed Mfg Overhead account in the DBA general ledger. You can click the search icon at right to get a list of the underlying transactions behind this amount.
Variance %
This is the variance between manufacturing overhead cost and its absorbed cost, expressed as a percentage. If manufacturing overhead cost exceeds its absorbed cost, this is a positive percentage, which means that manufacturing overhead cost was under-absorbed. If manufacturing overhead cost is less than its absorbed cost, this is a negative percentage, which means that manufacturing overhead was over-absorbed. You can click the lookup button at right to see the actual calculation.
Hours
Total Standard Hours
This is the total standard labor hours reported to jobs within this date range. Standard hours pertain to job routing sequences with an Hours Type setting of ‘Standard’ and are incurred as sequence quantities are entered or sequences are flagged as finished in the Job Labor screen. You can click the search icon at right to get a listing of the underlying transactions that comprise this amount.
Total Actual Hours
This is the total actual labor hours reported to jobs within this date range. Actual hours pertain to job routing sequences with an Hours Type setting of ‘Actual’ and are incurred when worker hours are entered in the Job Labor screen. You can click the search icon at right to get a listing of the underlying transactions that comprise this amount.
Total Labor Hours
This is the sum of the Total Standard Hours and Total Actual Hours.
Factored Labor Hours
Each labor transaction is adjusted by its work center’s setup and labor cost factors, using the formula below, and is totaled to arrive at the factored labor hours for this date range. You can click the search icon at right to get a listing of the underlying transactions that comprise this amount.
(Trxn Setup Hrs * WC Setup Cost Factor) + (Trxn Labor Hrs * WC Labor Cost Factor) = Trxn Factored Labor Hrs
Factored Overhead Hours
Each labor transaction is adjusted by its work center’s overhead cost factor, using the formula below, and is totaled to arrive at the factored overhead hours for this date range. You can click the search icon at right to get a listing of the underlying transactions that comprise this amount.
Trxn Total Hours * WC Overhead Cost Factor = Trxn Factored Hours
New Shop Rates
Current Labor Rate
This is the current hourly shop rate for absorbed labor.
Calculated Labor Rate
This field is populated when you click the Calculate button and is the calculated hourly rate for absorbed labor within this date range, based on this formula:
Labor Cost / Factored Labor Hours = Calculated Labor Rate
New Labor Rate
This field defaults to the Calculated Labor Rate value, but can be overridden if you expect an upward trend in business volume (in which case the rate would be adjusted downward) or a decrease in business volume (in which case the rate would be adjusted upward).
Current Overhead Rate
This is the current hourly shop rate for absorbed overhead.
Calculated Overhead Rate
This field is populated when you click the Calculate button and is the calculated hourly rate for absorbed manufacturing overhead within this date range, based on this formula:
Overhead Cost / Factored Overhead Hours = Calculated Overhead Rate
New Overhead Rate
This field defaults to the Calculated Overhead Rate value, but can be overridden if you expect an upward trend in business volume (in which case the rate would be adjusted downward) or a decrease in business volume (in which case the rate would be adjusted upward).
Calculate
After entering a date range and, when applicable, the total labor cost and overhead cost, click this button to populate the Calculated Labor Rate and Calculated Overhead Rate fields.
Save
Click this button to save the new shop rates. Work center hourly rates are updated by these formulas:
New Shop Labor Rate * WC Setup Cost Factor = New WC Setup Rate
New Shop Labor Rate * WC Labor Cost Factor = New WC Labor Rate
New Shop Overhead Rate * WC Overhead Cost Factor = New WC Mfg Overhead Rate
Setup Tab
Use this tab to identify GL accounts that are associated with direct labor and manufacturing overhead.
Cost of Sales Accounts
All your Cost of Sales accounts are listed in this grid. Account Assignments default accounts and Sales Order Exceptions Cost of Sales accounts are excluded from the Setup list. Purchase Order Exception Cost of Sales accounts will be listed.
Why only Cost of Sales accounts? With absorption accounting (which conforms to GAAP guidelines) direct labor and manufacturing overhead costs are not treated as expenses. Instead, actual labor and overhead costs are offset by the Absorbed Labor and Absorbed Mfg Overhead accounts, which serve to absorb these costs into your inventory as job labor hours get reported. Therefore, direct labor and manufacturing overhead accounts must be set up as Cost of Sales accounts, as they are in the DBA standard chart of accounts.
If your chart of accounts is not structured so that direct labor and manufacturing overhead accounts are Cost of Sales accounts, we suggest you convert to the DBA standard chart of accounts using the COA Conversion screen.
Grid Fields
GL Account, Description, Account Group
These fields identify the account.
Direct Labor
Select this checkbox against any account you consider to be a direct labor cost. In the standard chart of accounts, this would be the following account range:
54100 – 54500
What are direct labor costs?
Direct labor costs are the actual payroll costs associated with production worker employees, including benefits, taxes, and wages, as well as their share of workmans compensation insurance. Contract worker costs are also direct labor costs.
NOTE: Do not include payroll costs for manager, supervisor, shipping, receiving, warehouse, inspection, maintenance, and development employees, which are considered to be indirect labor costs.
Mfg Overhead
Select this checkbox against any account you consider to be a manufacturing overhead cost. In the standard chart of accounts, this would be the following account range:
58000 – 59300
What is manufacturing overhead?
Manufacturing overhead includes all the indirect costs associated with the manufacturing process, including the factory’s share of rent, utilities, maintenance, supplies, taxes, insurance, and depreciation, as well as payroll benefits, taxes, and wages for indirect labor, which includes shop manager, supervisor, shipping, receiving, warehouse, inspection, and maintenance employees.
NOTE: Manufacturing overhead should not include selling, general and administrative (SG&A) expenses.
History Tab
Each time the shop rates are updated, a history record is recorded on this tab to provide you with a complete history of shop rate changes, including the user who made the change.
