Expert answer:”Labor Costs”, BUS 315 Cost and Price Analysis Wee
Answer & Explanation:”Labor Costs” Please respond to the following:Identify at least two factors that VectorCal uses to determine its labor costs for the creation of the navigation system that it is marketing to the government. Specify key reasons why these two factors are important in determining the labor costs for VectorCal’s navigation systems. Support your response with one example of such importance.From the e-Activity, speculate on key areas where most companies fall short when determining their labor costs. Suggest two (2) methods that a company CEO should use in order to reduce price labor cost inconsistencies. Support your suggestion with two (2) real-world examples.Week 6 eActivityWatch the video titled “Business Calculations & Accounting: How to Calculate Direct Labor Cost” (1 min). Be prepared to discuss. Video Source: Youtube (2009, July 9). [Video file]. Retrieved from: http://www.youtube.com/watch?v=iukNYpj8WFw. This video can be viewed from within your online course shell.bus315_week_6_scenario_script_10_2_13.docx
bus315_week_6_scenario_script_10_2_13.docx
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Slide #
BUS315 Week 6 Scenario Script: Analysis of Direct Labor Costs
Scenes
Narrations
Slide 1
Scene 1
Semi-large building
(VectorCal) and have avatar
inserted to represent her
entering the building
Slide 2
Scene 2
Introduction to the week
Takes place in Dominic’s
office
Dominic: Welcome back again Sally! I hope you
had a very productive week and learned a lot
while working with Luke last week! He is very
knowledgeable in his field and is truly an asset to
our team.
Sally: Thanks Dominic! Luke and I worked really
well together and we went over quite a bit of
information pertaining to cost and pricing data in
his department. I took a lot of notes and several of
the key points we went over.
Dominic: I’m glad you learned a lot from Luke
and have some notes to go back to regarding the
key concepts you learned. I hope you are ready to
complete another portion of the project I have
assigned you. You will again be working with
Luke this week; I need him to cover a few more
concepts involving direct labor costs. Be sure to
take some more notes and pay attention to what
Luke goes over with you. The concepts discussed
this week will really assist you with this big
project we are working on. As far as the project
goes, I can’t really go into details at this point
since we are really trying to keep this project
under wraps for now. However, I can assure you
that this project will be large and very time
consuming.
Sally: I am excited to be working with Luke
again. I have my pen and paper ready to take
notes while I go over this week’s materials with
Luke. I am very interested to see what this big
project is all about and I will do my best to be
prepared for when the project is ready to go under
way.
Dominic then leads Sally
down the hallway to Luke’s
office
Slide 3
Scene 3
Luke’s office to go over key
concepts related to direct
labor costs
Dominic: I’m glad to hear that and I love your
enthusiasm. We are lucky to have you assist us
with this project when it begins; you have
accomplished so much during your stay with us!
Now let’s now make our way back down to
Luke’s office.
Dominic: Good morning Luke! I have brought
Sally back to you for the week. I will need you to
go over some more concepts related to direct
labor. As I told you and the rest of the staff, we
are looking to undertake a huge project and I need
everyone to be on the same page.
Luke: I completely understand Dominic. I will
make sure to get Sally up to speed with some
other key concepts she may need to know.
Sally, I hope you’re ready for another great week
together. I have so much for us to do!
Sally: It is my pleasure to be working with you
again Luke! I am ready to get started and am truly
excited to learn even more from you!
Dominic, I think I am in good hands and I will
report back to you next week. Thanks again for
helping me prepare for this upcoming project; I
feel that at the end of this internship I can be a
real asset to this project you have been discussing.
Dominic: Thanks again Luke and thank you Sally
for being so flexible. Trust me, all of your hard
work will pay off at the end. Good luck and I look
forward to talking with you next week.
Dominic Leaves
See you later everyone!
Slide 4
Scene 4
Luke’s office to go over key
concepts related to direct
labor costs
Luke: Well, here we are again Sally! This week
we will be talking about direct labor costs and its
effect on productions. Before we get started, can
you tell me a little bit about what you know about
labor costs and how the government would use
this information?
Sally: Here is what I know thus far.
I recall that the government places many contracts
for physical products which they refer to as
supplies. I also know that federal acquisition
regulations define these supplies as all the
properties that are expecting land or have interest
in land.
Luke: Great job! Let me add a couple more
things for you though. Take notice that the
modern definition of supplies refers to the entire
range of physical products that the government
buys, including raw materials, parts, and
components. We also see that fundamentally, all
products and equipment sold contain labor inputs
of some kind and the government often does a
price analysis by itself when buying these
products.
Sally: I do have a question though; I keep
hearing the term direct and indirect labor costs at
meetings in the CEO’s Boardroom, what is the
difference?
Luke: That is a fine question to ask. Direct labor
costs refer to the cost of labor specifically
identified with a particular contract that a
company is doing. We see that it is general
practice to refer to the following three types of
labor costs as direct labor:
Labor directly associated with the work being
produced;
Labor readily identifiable with a particular
objective such as a contract; and
Labor important enough to warrant identifying
and measuring so we can keep up with its cost.
Sally: I think I understand the components of
direct labor now! What about indirect labor?
Luke: When it comes to indirect labor, this is
different from direct labor because it is not
specifically identifiable to a given job or contract.
For example, a supervisor may spend more time
on one contract than another, and hence it would
be difficult to apportion their time and cost to
individual contracts.
Sally: Oh I see the difference now between the
two. Thanks for clearing that up for me.
Luke: Not a problem at all. There is one more
thing I would like to share with you.
Make a note that there are some types of labor
that can be either direct labor or indirect labor.
The government is normally quite happy to let
companies charge up individual workers any way
they please, with a couple of restrictions. The
Cost Accounting Standards do not tell companies
which type of employees should be direct labor
and which should be indirect, except in very
broad terms. The standards, if they apply to the
company at all, require the company to tell the
government how they categorize people as direct
or indirect labor and require that the company let
the government know if they want to make a
change.
Slide 5
Scene 5
Luke’s office to go over key
concepts related to direct
labor costs
Sally: That is very interesting and I am glad you
shared this with me. I have jotted a few notes
down about this. It seemed pretty important to
keep in mind.
Luke: Now let’s talk about how to estimate labor
costs and the various processes that are involved.
Before we get started, could I get a temperature of
your background knowledge on the subject of
labor costs?
Sally: I think I have some valuable insight to offer
on this subject. I know that companies routinely
use systematic procedures to estimate labor costs.
I also recall that prior to submitting a bid or
proposal; competent contractors examine
thoroughly the engineering drawings, schedules,
specifications, and standards to determine exactly
what is to be done. I don’t really remember what
occurs after; could you fill in this blank for me so
I can get back on track?
Luke: Sure thing! You were doing so well too.
Once the standards are determined, the
contractors will estimate the direct labor hours
that they believe will be needed to do the work.
In many instances, they may also perform a site
visit to assess the impact of environment and
terrain on their estimate. After determining the
estimated labor hours, direct labor cost is
calculated by multiplying each type of labor hour
by an appropriate hourly rate. One of the most
widely used methods to estimate labor cost is the
work breakdown structure.
What do you recall about a work breakdown
structure?
Sally: I recall that a work breakdown structure
is often used to estimate direct labor hours for a
proposed project. The resulting estimated hours
can then be multiplied by anticipated labor rates
to determine the estimated labor costs.
Luke: Good work, that is correct! To add to this,
a work breakdown structure also breaks a project
down into its major parts, and then each major
part is broken down into its subparts, continuing
until the entire project is broken down into the
lowest level of detail. Finally, the entire project
will then be divided into small enough segments
to work with.
Sally: Aren’t phase diagrams another method
used by contractors to estimate costs?
Luke: Yes they are! They are similar to the work
breakdown structure approach, except that the
details of the work are spread out over a time
base.
Slide 6
Scene 6
Luke’s office to go over key
concepts related to direct
labor costs
Sally: So why do you think it is so important to
analyze direct labor costs? We seem to spend a
lot of time collecting this type of data and
information.
Luke: Well in fixed-price contracts, the detailed
analysis of direct labor cost is extremely
important when these costs are a significant part
of the total contract costs. There are two basic
reasons for this which includes: finally agreed
upon direct labor costs are one hundred percent
allocable to the contract; and indirect costs are
likely to be overstated if direct labor cost is too
high.
Keep in mind that a highly precise analysis of
direct labor costs is generally not feasible in costreimbursement contracting. Why do you think
this is?
Sally: Would it be because the government is
protected in cost reimbursement contracts because
it will pay the actual cost of performance, not a
pr-estimated amount?
Luke: This is correct Sally! Nevertheless, the
government has a responsibility to examine
proposed direct labor costs and to consider the
following items:
Differences in labor rates;
Level of the proposer’s understanding of the
work; and
Fees.
Make a note that federal acquisition regulations
give the directions for preparing a contract pricing
proposal. For issues concerning the submission
of direct labor costs, the instructions are simple
and straightforward by providing a time-phased
breakdown of labor hours, rates and cost by
appropriate categories, and the furnishing of bases
for estimates.
Sally: That makes a lot of sense now, I have
written down a couple of things to help me
remember these main points.
Luke, I would now like to know how you project
the wage rates in the future.
Luke: I would be happy to share this with you!
There are several ways to determine average
wage rates. A few firms use a plant-wide rate,
which is a single hourly wage rate that applies to
all manufacturing labor. Many firms also use
departmental rates, which are average rates
established for each separate manufacturing
department. Which rate do you think is used more
commonly?
Sally: I would think that the departmental rates
would be used more commonly. I remember
learning that these rates work well when the skill
mix for your work is very similar to the skill mix
used to determine the departmental rate. However,
I recall that these rates will cause an
overstatement of direct labor cost when your
work gets a lower skill mix.
Luke: That is correct, great job Sally! Keep in
mind that most firms with an engineering
department use a labor category rate for that
department. In manufacturing, rates by labor
category are most commonly used to predict
engineering direct labor costs because differences
in wage rates are significant among draftsmen,
project engineers, and project managers. All
these labor categories, including project
managers, are almost always direct costs. Sally,
what can you tell me about individual labor rates?
Sally: Aren’t individual labor rates used in
unusual circumstances? I believe these rates
would be used when named individuals, generally
highly paid, are used for contract efforts. I also
know that when individual rates are used, the
offer will name the individuals to be assigned,
estimate the hours required, and state their wage
rates.
Luke: Right you are, you hit the nail on the head
with your response. As we move on, make note
that none of the wage rate methods we discussed
are precise. It is not our job, as cost analysts, to
tell buyers what system to use. It is instead our
job to assess the results of the system actually
being used.
Sally: I think I got it and have written down this
information in my notebook.
Slide 7
Scene 7
Luke’s office to go over key
concepts related to direct
labor costs
Luke: Great! Let’s move on.
Sally: In a meeting recently I heard Dominic
talking about the historical cost method, what
does this mean?
Luke: The historical cost method is used for
estimating the direct labor hours based on using
actual experiences when making the same or
similar products. We see that most manufacturers
maintain very precise historical data on the actual
times used for each step when making their
products.
Sally: Couldn’t these manufacturers estimate the
hours needed to build products for a new proposal
if they had previous data on how long it took to
make the products before.
Luke: Yes Sally and this is indeed what most
manufacturers do. To estimate these hours,
manufacturers will simply adjust the previous
times to the quantity needed for the current offer.
Sally: Wouldn’t this be where negotiated
contracts come into play?
Luke: You read my mind I was just going to
cover this concept. Keep in mind that negotiated
contracts are generally awarded to companies
with prior experience in manufacturing the same
or similar items because these companies will
usually have complete historical data on labor
costs for prior contracts. Do you think firms need
to have experience making a specific product?
Sally: I would think that a firm doesn’t need to
have experience in making an identical product. I
feel that since many of the manufacturing steps
for the other product will be the same or similar to
those for the new product, experience may not be
needed.
Luke: Nice response, you definitely have a good
understanding on that contract type. One thing I
would like for you to take note of is the fact that
the historical cost method is commonly used to
estimate labor costs, even with its disadvantages.
Sally: Thank you for sharing that with me. What
is next for us to go over?
Luke: Not a problem at all. I would now like to
cover with you the labor standards methods that
we use at VectorCal. This is very important;
Dominic may ask you some questions about this
method.
Sally: Am all ears Luke!
Luke: To start off, the labor standards method
is an objective method for estimating labor hours
that does not rely on prior experiences. Make
note that these labor standards are expressed as
output standards or time standards. When using
an output standard it states the production rate
for a given unit for a specific manufacturing task.
On the other hand, a time standard is the time it
should take to complete one task. Keep in mind
that the standard time for an operation consists of
the basic time required to complete the task plus
the leveled time, personal delay and fatigue
allowed, and special allowance. Any questions so
far?
Sally: Not right now, everything makes sense.
Slide 8
Scene 8
Luke’s office to go over key
concepts related to direct
labor costs
Luke: I am now going to talk about the concept
of “learning curve.” Now I know you may have
heard this phrase while in school but its meaning
takes on a different meaning in the world of
productions.
Sally: Yes, I have heard this phrase before but I
am interested to see what it means when it
involves the production line.
Luke: Here at VectorCal, we are continually
performing repetitive tasks, but more importantly
we are almost always looking for and finding
faster ways to complete these tasks. The learning
curve is simply a graph that shows how this
improvement can be measured and utilized. This
graph also provides a way to predict labor hours
and costs based on our beginning hours and costs.
Sally: Couldn’t we use this curve to predict the
labor hours and costs needed for specific units if
we have the standard hours for a first or
intermediate unit?
Luke: You are right and this is exactly what we
do here. These learning curves are very beneficial
to us!
Furthermore, early developers of the theory called
it the learning curve because they believed that
learning by using workers saved the company a
lot of time. When we use these learning curves,
we use percentages to express improvement
factors. Keep in mind that you shouldn’t be
misled about learning curves. They are not that
simple. Proper applications are very complex and
the concept is only useful when mixed with good
judgment.
Sally: I can see learning curves are very
important! Can you talk a little bit about the direct
and indirect labor costs at VectorCal and the
industry as a whole?
Luke: Sure thing! Like other manufacturers, we
use direct and indirect labor to convert raw
materials and purchased parts and components
into finished goods. In order to accomplish this
task we need to complete several physical
operations including cutting, grinding, and
drilling. When we use factory direct labor we are
talking about the people who are actually making
parts from raw materials, installing parts into
components, or assembling finished items.
Sally: Wouldn’t some of these costs be on the
borderline of direct and indirect?
Luke: Great question! Let me explain this a little
more. We see that different companies have
different practices for classifying labor costs. For
example, some companies classify all foremen as
indirect labor and others classify them as direct
labor.
Sally: That makes a lot of sense!
Luke: There are a wide variety of processes and
direct labor skills that are present in a factory at
any given time. Make note that each process has
the direct labor people needed to get the work
done. However, the mere fact that one company
has a higher set of wage rates than another does
not necessarily make the higher wage rates
unreasonable.
Sally: Luke, what kind of factors can affect the
hourly rate? I only asked because I see several
engineers on the production floor and I was
unsure of how their rates differed.
Luke: Thanks for bringing up that topic. As you
can see there are numerous factors that can affect
the hourly rate. Just like you said before, there are
quite a few engineers present in my department.
In order to validate each engineers wage rate we
are checked by audits or by completing a
comparison based on the Department of Labor’s
prevailing rates for each area.
Sally: I think I have enough written down now to
give an accurate report to Dominic next time I see
him. Thank you again for sharing with me all this
great information.
Luke: Not a problem at all! I was glad I was of
assistance throughout the week.
Before we get ready for our weekly review, I
would like for you to go through a review activity
I have prepared to help you better grasp some of
the concepts we covered this week.
Slide 9
Scene 9
Tab interaction that will have
audio for each tab.
Users will click each item and
be greeted with images and
narration.
Luke: Direct labor cost is the cost of labor
specifically identified with a particular contract
that a company is doing. It is a general practice to
refer to the following three types of labor costs as
direct labor:
Labor directly associated with the work being
produced;
Labor readily identifiable with a particular
objective such as a contract; and
Labor important enough to warrant identifying
and measuring so we can keep up with its cost.
Luke: When projecting wage rates there are
several ways to determine average wage rates. We
see that many firms may elect to use a plant-wide
rate, which is a single hourly wage rate that
applies to all manufacturing labor.
Luke: The Historical Cost Method is used for
estimating direct labor hours and is based on
using actual experience when making the same or
similar products. Most manufacturers maintain
very precise historical data on the actual times
used for each step when making their products
and this can assist with long term productio …
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