Page 56 - Essentials of Payroll: Management and Accounting

Accumulating T ime W orked
In the exhibit, the cost of direct labor is very low, while the cost of
collecting all associated data is much higher than for the other two types
of costs,even when they are combined.The proportions shown here are
quite common. If a company is in this situation, then the data-tracking
system for direct labor is probably not worth the cost of administration.

That said,if this data-tracking system can be made more efficient,perhaps
with the data collection methods described in the next section, then it
may still be worthwhile to use a reasonably detailed timekeeping system.
In short, it makes sense to employ a relatively detailed time-tracking
system for direct labor if the proportion of total company costs is heavily
skewed in favor of direct labor costs,profit pressures are high,or the cost
of the timekeeping system is relatively low in proportion to the amount

of direct labor cost incurred.

Data Collection Methods
In most cases, a company’s total direct labor cost is not so high that it
warrants the creation of an elaborate data collection system.Instead,you
can either focus on a simple system that collects only the most basic data
or else install a system that utilizes a greater degree of automated data
collection, thereby keeping costs low while still obtaining a high degree

of detailed information.
If a simple data collection system is needed, the easiest possible system
to implement is one in which employees are assumed to work 40 hours
per week and the only need to log hours is to record any overtime,
which is recorded on an exception basis and forwarded to the payroll
staff; the staff then enters the additional overtime costs into the payroll
system and generates payments to employees.This approach is most useful

when a company has a relatively fixed base of direct labor employees who
rarely work any additional hours and who also rarely work less than a
fixed number of hours per week.A further justification for such a system

29