In the food industry, it is of vital importance to measure the deviation in direct labor cost and analyze its causes, in order to drive the pertinent improvement actions.
It is one of the main cost components in the factory, although normally much lower than the cost of raw materials, especially in less technologically advanced and personnel-intensive production environments.
If labor costs are allowed to deviate significantly from planned standard costs, it can have a negative impact on the profitability of the business, very significant in low margin environments, almost all except "gourmet" products, where it is important down to the second decimal place.
Measuring deviations allows you to quickly identify and correct any variation in labor costs and keep them under control. Our MES system for the food industry is a great ally to manage your factory more efficiently, so we invite you to get to know it before or after reading this article.
Index
What are direct labor cost variances in a factory?
Deviations in a factory are situations that deviate from what was planned or expected, being a chain of events that generate a negative result in production. These can be caused by management errors, faulty or defective machinery , lack of personnel training, among other factors.
Variances in direct labor costs in a factory are the differences between actual costs and budgeted costs for workers involved in production in a factory. These variances can arise due to several reasons, such as lower productivity, rework, higher personnel involvement or cost/hour higher than the standard cost, in general, inefficiencies in the execution of production. Evaluating these is critical.
Measuring direct labor deviations in the food industry
Measuring direct labor variances is possible by comparing the actual cost of labor with the standard cost. The complexity lies in calculating this actual cost and associating it with a given product, it is necessary to record, for a given production order, the specific people involved, the time spent by each one, their company cost and according to day/hour of execution, to name a few, and compare it with the expected standard cost.
If the actual cost is higher than the standard cost, a negative variance is considered to exist, meaning that the actual costs are higher than expected.
Conversely, if the actual cost is lower than the standard cost, it is considered a positive variance, indicating that less was spent than planned, and the company will earn higher profits due to the cost reduction.
Positive or negative factory cost variances significantly affect the financial results of the industrial company, since they are equivalent to 60-80% of its total turnover, there is no larger budget item.
These variances, shown in the greatest detail, on time (not on the 10th of the following month) and, of course, in euros, we are talking about cost controlling in real timelThese deviations, shown in maximum detail, on a timely basis (not on the 10th of the following month) and, of course, in euros - we are talking about real-time cost control - enable companies to identify and prioritize those areas where processes can be improved and generate significant cost reductions on a recurring basis, as well as present savings that must be maintained in the future.
Broadly speaking, these are the steps that should be followed to measure and act on your factory labor deviations:
- Determine the standard direct labor cost: involves estimating the cost expected under normal conditions to produce a given unit of product or service. To do this, factors such as workers' wages, labor hours required to complete a unit of output and other related costs must be taken into account. It is important to keep in mind that the standard direct labor cost is an estimate and may vary depending on actual production conditions. Therefore, it is necessary to regularly review and adjust these standards to maintain their accuracy and usefulness in decision making.
- Calculates the actual direct labor cost: this cost is calculated using actual data on the amount of time spent on the production of a given product and the actual wage rate paid.
- Calculates the direct labor cost variance in €: this variance is extracted by subtracting the standard cost from the actual cost.
- Analyze the cause of the deviation: if there is a significant deviation, it is important to analyze the root cause of the deviation: Overstaffing, excessive time to manufacture the product or price €/h higher than budgeted. This can be done automatically through the union of best practices and technology, with alerts/messaging to act on the spot or open projects that review the production process, labor efficiency, quality of work, wage rate and other factors that may affect the cost of labor.
- Take corrective action: Once the root cause of the deviation has been identified, corrective action can be taken to reduce or eliminate the deviation. This may include improving processes, training the workforce, adjusting wage rates, and other strategies.
Labor deviations in the food industry can be measured in a variety of ways. The following are some of the most common measures:
- Production records: Production records are important tools for measuring labor variances. These records can be manual on digital devices, semi-automatic or 100% automated through indoor geolocation. They are used to compare the quantity of products expected to be produced with the actual quantity of products produced, in a given time and maintaining the standard equipment (target number of people). The difference between these two quantities indicates the labor deviation in a manufacturing process.
- Method and time analysis: This method of measurement focuses on work efficiency. For example, one can take times and movements to work on a production line and compare them to the established standard. If the speed or number of movements does not meet the standard, it can be deduced that there is a deviation in the amount of labor used in the work due to process inefficiency.
- Productivity measurement: Productivity measurement is an effective method of measuring labor detour in the food industry. In this case, production and quality levels are measured on an hourly, daily or monthly basis. If production and quality levels do not meet established standards, labor detour is likely to exist.
A MES/MOM tool will help you:
- Automate the capture of the necessary data in the plant, minimizing direct and indirect costs of all related administrative tasks.
- To reliably calculate productivity deviations and their impact on labor costs, as well as to quantify and identify the causes of these deviations in each production run.
- Monitor Production progress at all times, with alerts for tactical/immediate decision making to minimize loss in the short term, as well as connect with analysis and improvement routines(LEAN), providing objective and updated information in real time.
- Keep standards up to date at all times.
In conclusion, to measure labor deviations in the food industry, methods must be used that allow comparing the amount of work expected to be performed with the actual amount of work performed and that also allow analyzing the times and movements of the employees and the productivity of the plant. In this way, problems can be identified and adjustments can be made to improve efficiency and productivity and variable costs in the plant.
Why it is key to carry out adequate control
Controlling labor cost variances is essential to the financial health of a factory. Labor is often one of the largest costs in manufacturing a product, and any deviation from the planned cost can significantly affect the profitability of the business.
If variances in labor costs are allowed, several serious problems can arise. First, these deviations can accumulate over time and cause an overrun in the company's overall budget. In addition, if labor costs are too high, the factory may be forced to increase the price of its products, which could make them less competitive in the marketplace.
Another problem that can arise is that labor costs are not always related to actual production. If labor costs are too high and are not justified by production, this could be a sign of mismanagement.
Cost variance tracking and analysis can also be used as a performance evaluation tool at both the individual and team level. Employees and teams that consistently exceed established standards can be recognized and rewarded, while those who fall below standards can receive additional support or training to improve their performance.
Measuring variances is also crucial for planning and budgeting. It allows you to compare actual costs with expected costs and provides valuable information for adjusting future budgets and setting more realistic goals.
In summary, controlling labor cost variances is important to ensure the financial health of a plant, maintain competitiveness in the marketplace and ensure efficient resource management.
If you want to adequately control the deviations of direct labor in your factory, we invite you to contact us without obligation.
Managing Partner at MESbook
