An Article Critique
Presented to the
De La Salle University
In partial fulfillment
Of the course requirements
In MODCOS1 K34
Dr. Merlinda Bucad
Hipolito, Chelsea Marie Y.
July 15, 2013
What Happened To Direct Labor
Posted on May 9, 2013 by Bill Horst, CPA, CMA, CGMA
Costing For Profitability http://costingblog.wvco.com/2013/05/09/what-happened-to-direct-labor/
One of the topics that come up frequently at our cost forums is related to the best method of allocating overhead to production. In years gone by, direct labor was frequently the best choice for doing such allocations. But more recently, direct labor is less and less likely to be the best choice. What’s happened to direct labor?
The explanation is really quite simple. As American manufacturers came under increasing pressures related to keeping down costs, they were forced to turn to automation and technology to improve production efficiencies and reduce the overall cost per part. Raw material prices are often subject to changes in market price with little or no control as it relates to market-driven prices on such commodities. However, management does exert substantial control over how much labor and overhead is incurred to produce parts.
In the early days of my career it was not uncommon for my manufacturing clients to have 25% of the cost of goods sold associated with raw material, another 25% or more associated with direct labor, and then someplace around the neighborhood of 10-20% associated with overhead. As technology advanced in the manufacturing area, and more and more manufacturers came under pressure to reduce cost, those numbers have changed dramatically and today I find that raw material cost might be in the neighborhood of 50% of the cost of goods sold with direct labor being in the neighborhood of 10-15% with