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Standard time determination, Standard rate determination Homework Help, Tutoring

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Standard time determination:

These are also known as labour performance or labour efficiency standard. For each operation or activity, standard time is specified. On the following, standard time is based:
(a) Average of past performance, (b) Work sampling, (c) Test run, (d) Time study &
(e) Motion study.

The job is divided by the industrial engineers in different operations for the development of time standard & after the unnecessary activities has been eliminated a sequence is performed which is likely to lead to maximum production. For determining the standard hours which an average worker may require to do a specified job, the industrial engineers perform time & motion study. For the development of time standards, allowance is made for machine breakdown, preventive maintenance, fatigue & rest time etc.

Now days, for the development of time standards, another term “work sampling” is also being used. Under this technique, at random moments, performance of an activity is observed & for a reasonably long period collection of data is done. It helps in development of statistically valid conclusions which are related to time that may be required for an activity. Thus “work sampling” constitutes statistical methods application for the purpose of collecting basic data which is required for development of time standards. The defect of this technique is that only “what it is” is reflected by it & for establishing “what it ought to be”, the adjustment of the same has to be made.

Standard rate determination:

Generalizing the procedure for development of labour standard rate is very difficult. Special study & regard to the involved factors is the requirement of each situation. On the basis of collective bargaining agreements with unions & Government bodies’ rulings, the development of standard rate is done. Hourly wages, piece rates & differentials of bonus are clearly mentioned in these agreements. However, in non-unionized organizations, on the basis of negotiations between personnel manager or departmental manager & employees, the development of standard rate is done. The standard rate determination is very simple provided modern wage incentive system is in vogue. A basic rate which gets increased on the basis of merit rating of employees plus according to the management policy, adjustment of bonus & fringe benefits; is being provided by job evaluation.

The treatment of bonus, overtime & fringe benefits for standard rate fixing is as follows:

Bonus: Bonus, where it is a regular feature, becomes part of wages & inclusion of the same in standard rate setting is logical. Bonus, where paid as an ex-gratia payment should be treated for that period, as an overhead.

Overtime: When because of the reason that the demand in regular hours is not possible to be met with, regular overtime is worked; such overtime should be included in standard rate setting. However, when overtime is paid occasionally, the same should be treated as an overhead for that period.

Fringe benefits: Sometimes, up to 30% or more of wages is constituted by fringe benefits. Workmen’s compensation, insurance, employer’s contribution to pension, employer’s contribution to group insurance, payroll taxes etc. are included in fringe benefits. Sometimes, no constant proportion to wages is bearded by these benefits. On the other hand, sometimes these benefits are a straight percentage of wages. In other words, fringe benefits may be variable or fixed. For the computation of standard rate, consideration should be given to fringe benefits bearing constant ratio to wages. These fringe benefits which are fixed in nature should be treated as overhead.

Thus after the establishment of time standard & rate standard, the calculation of standard labour cost for an operation is done by multiplying standard hours which have been allowed by standard rate which have been set for the operation.

(3) Factory overhead standards:

Determination of standard for factory overhead is not important from the view point of control, because at the discretion of operating level, there is neither incurrence nor use of facilities. For the purpose of product costing & product planning, the development of standard for factory overhead is done. The under mentioned steps are involved in the fixation of factory overhead standards:

(1)Level of production determination:

For the determination of rate of overhead, this is the starting point. For a particular level or production, capacity estimation of overhead especially fixed overhead, is done. With reference to any of the capacities such as normal capacity, budgeted capacity, maximum capacity & practical capacity, level of activity can be determined. With the expectation of utilization of a particular capacity which is known as budgeted capacity, the budgets are prepared. In terms of direct labour hours, direct labour cost, units produced & machine hours, level of activity can be expressed. For arriving the standard rate of overhead, this level of activity serves as the denominator by which estimate of standard overhead is to be divided.

(2) Standard overhead estimate determination:

Budgets controlled overheads. Upon the past estimates depends the budgets which cannot be considered automatically as standard. For the purpose of ascertaining “what cost ought to be” which is represented by budget, considerable amount of time & energy is spent. For the purpose of arriving at the standard overhead estimate, suitable adjustments need to be carried out, if there is a variation between “what cost ought to be” & budgets. For arriving at the standard overhead rate, this standard overhead estimate should be divided by budgetary capacity.

(3) Classification of overhead in two categories i.e. fixed overhead & variable overhead:

The hypothesis of controlling of the overhead is that the cost can be divided into two categories, i.e. variable & fixed. Separate rates are developed for fixed overhead & variable overhead for developing standard overhead rates also. Thus for each of these categories, determination of standard overhead rate is preceded by the classification of overhead broadly in these two categories.

(4) Standard factory overhead rate:

The end result of the effort which is directed towards determination of factory overhead rate standard is the standard factory overhead rate. First, for fixed overhead & variable overhead, the standard rate is arrived at separately which is as follows:

(a) Standard fixed overhead rate = Standard fixed overhead for budget period / Standard base for budget period, i.e. in hours or units level of activity is expressed.

(b) Standard variable overhead rate = Standard variable overhead for budget period / Standard base for budget period, i.e. in hours or units level of activity is expressed.

The development of a total standard factory overhead rate is done after the determination of standard fixed overhead rate & standard variable overhead rate.

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