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Labor Hours or Machine Hours: Which is Preferable?

Dynamo's Second Dilemma

Dale Dynamo, owner of Dale's Miraculous Medical Devices (DMMD), is a forward-thinking business owner. We learned of his strategy to adopt lean thinking and some of the costing issues he faced in the October issue of BONEZONE. At the same time, he realized that many of his manufacturing operations were not conducive to cellularization; they would, at least for the foreseeable future, have to remain deployed in a job shop configuration with like-kind equipment located in groups and the parts being manufactured moved from machine to machine as the manufacturing process takes place.

One afternoon, as Dynamo reviewed a group of customer quotations, he noticed something that didn't appear to make a lot of sense. Two of the quotations required the use of the same mid-sized machine center, but the cost per hour for using that machine to produce one part was twice as much as the cost per hour for producing the other. He called in his Controller, Marvin Myopia, for an explanation.

"That's simple," explained Myopia, "one part is large and difficult to handle so two workers are required to load and unload the part when we do the machining; the other one is much smaller and easier to handle, so it only requires one worker. As a result of needing two workers instead of just one, the hourly cost for the large part is double the cost of the other." Myopia then backed up the explanation with the analysis of the company's 376 percent direct labor-based overhead rate shown in Exhibit 1.

Exhibit 1: DMMD's Direct Labor-Based Overhead Calculation

hicks 1

"You see," continued Myopia, "we take all of the costs we can attribute to the machining operations, like the workers' fringes and taxes, shift and overtime premiums, depreciation, utilities, purchased maintenance services and the supplies we buy to support machining, and we assign them to the overhead pool. We then analyze the company's support departments and assign portions of them to the pool as well. This includes a charge for the space it occupies, human resource support, maintenance performed by our employees, the department's supervisors and the work done by our engineers to support the machine centers. When we add them all up, it comes to $1,084,000. We then divide this by the $288,000 paid to the workers and arrive at the 376 percent rate. Since two workers are needed to produce one of the parts, the total hourly cost is twice as much for that part as it is for the part that only requires one worker."

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