A labor standard is the amount of labor time that is expected for the completion of a task. It is sometimes referred to as the standard labor rate. The labor standard concept is used when planning how many employees to assign to a task, which is part of the budgeting and planning processes. For example, a company may conclude that, given the amount of a labor standard, it must maintain production through three shifts to ensure that a sufficient number of units are produced to meet the requirements of the sales forecast.
Also, a labor standard can be used to judge the performance of employees, which may be linked to bonus and retention plans. For example, if an employee can produce more than 10 units per hour, she will receive a bonus. Conversely, someone who cannot reliably produce at least eight units per hour after a suitable training period will be let go or be required to take additional training.
A profit margin can be added to a labor standard to arrive at a billing rate that is charged to a customer. For example, a print shop could apply a standard hourly rate to a job to arrive at a quote for a customer order.
A labor standard can be based on a theoretical standard, which is the absolute best efficiency level that can possibly be achieved. However, real-world results are nearly always worse than the theoretical standard, so this approach is not usually recommended. A better alternative is to derive a labor standard that incorporates a modest stretch goal that can reasonably be attained with some targeted process improvements.
Labor standards are frequently used to develop labor variances. In particular, the amount of time stated in a standard is compared to the amount of actual labor experienced, which results in a labor efficiency variance. Or, the standard cost associated with a labor standard is compared to the actual labor cost incurred, which results in a labor rate variance.
The quantity assigned to a labor standard can be difficult to derive, since it involves assumptions regarding the work environment, employee training levels and experience, the repetitiveness of production, and other factors. This analysis is usually made by an industrial engineer as the result of an on-site review of the current process. Because of the many factors involved, actual performance against labor standards can result in quite substantial variances.
A labor standard for a complex process may include a number of individual labor standards that are compiled into a comprehensive labor routing. The labor routing itemizes the stages of work involved in the process, and the labor required for each stage. This information can be used for a variety of purposes, including:
- Labor hiring plans
- Accounting for the value of ending inventory and the cost of goods sold
- Manufacturing process flow planning
- Labor performance analysis
The cost of a labor standard includes not just the labor rate per hour of the labor classification assumed to be involved in the work, but also the employer-paid portion of payroll taxes and any related employee benefits.
A strong case can be made against the use of labor standards, since they tend to focus employees on working faster, rather than producing error-free work at somewhat lower unit production volumes.