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Hi Cath. Wondered if you could help me.
CH1
BPP
Analysing and Managing costs
Example 4XY manufactures a range of timber products and is now considering a JIT production system. It employs staff who are contracted to work and be paid for a total of 3,937.75 hours per month. Their labour efficiency ratio is 96% and as a result they are able to produce 3780 standard hours of output each month in a normal working hours. O.T working is used to meet additional demand, and staff are paid a premium of 50% to the normal hourly rate of £10 per hour. In Month 1 demand is 4000
Calculate the overtime for M1?
XY has a forecast of demand:
Month Demand Basic production Increase/ decrease in inventory
1 4000 3780 220Overtime
= M1- 220/96%= 229.17 *£15= £3435.55
What I do not understand is why we are dividing 220 by 96%? Why are we doing that?
Thanks
Hi – Thanks for your question.
If workers were 100% efficient then one labour hour of input would result in exactly one hours worth of output. I.e. none of the labour input time would be wasted or lost – every moment would be productive.
In reality and in this scenario – the workers don’t operate on 100% efficiency there is effectively a standard loss occurring in terms of how many labour input hours are needed to become output hours. One labour hour of input is worth 96% of an hour in terms of output.
Hence, in order get 3780 hours worth of output per month the workers must be employed and paid for total of 3937.75 hours ( 3780/0.96).For the order – we will need 4000hours worth of output. We already have 3780 effective output hours in the month so we require 220 more effective/ productive hours.
In order to get these 220 effective hours – taking into account that effective output hours are only 96% of input hours then we need to pay the workers for 220/0.96 = 229.16 hours extra. All of these will be at an overtime rate of $15.
Hope that explains ok
Cath
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