I work for a manufacturer in the U.S. We use standard cost for inventory valuation. Currently, we are absorbing materials, direct labor and overhead to the cost value of the inventory items we produce. However, I am not seeing the levels of absorption I would expect to see given the amount of work everyone is doing in the factory.
We use a flat 85% of labor costs as our guideline for direct labor. The 85% is full-capacity labor less breaks, holidays, vacation, sick, non-production related tasks, etc. Every month, I am having to make an adjustment to the inventory valuation to increase the value to meet the 85% labor. Then, the following month, I have to relieve this adjustment to account for the inventory turnover as goods are sold.
I've checked the work orders and they are all being completed accurately.
The only think I can think is causing this is maybe the workers are being less efficient than they should be and are possibly taking longer to complete tasks. Perhaps the standard costs have experienced "cost creep" due to inefficient labor practices being performed in the factory?
Any thoughts?
We use a flat 85% of labor costs as our guideline for direct labor. The 85% is full-capacity labor less breaks, holidays, vacation, sick, non-production related tasks, etc. Every month, I am having to make an adjustment to the inventory valuation to increase the value to meet the 85% labor. Then, the following month, I have to relieve this adjustment to account for the inventory turnover as goods are sold.
I've checked the work orders and they are all being completed accurately.
The only think I can think is causing this is maybe the workers are being less efficient than they should be and are possibly taking longer to complete tasks. Perhaps the standard costs have experienced "cost creep" due to inefficient labor practices being performed in the factory?
Any thoughts?