Costs Allocation Methods

To allocate costs to products is more complicated where more than one type of product is manufactured. For instance, the same worker can work on more than one product during a day or week. For example a worker can be responsible to do welding on chairs, tables and other products. To do a proper costing on a product, it is necessary to know the quantity of material in the product, hours spent and on what basis the overheads will be allocated to the different products.

1. Material

An aspect in calculating the material in a product is that the material must be calculated at cost and must exclude VAT.   The price of material must also be decreased by the discount received from the supplier and increased with transport costs.  If there is unusable material, the total amount must be brought into consideration, but if some of the off-cuts can be reused, only the actual quantity used before off-cuts must be used as basis for the calculation of material for the product.

2. Labour costs

There are different methods to calculate the labour costs per hour.  It is not always necessary to calculate an hourly tariff for each individual worker. It can also be calculated for the business as a whole or per group of workers. 

The total labour of a worker or the business must be the cost to company.  Cost to company will include the basic wage or salary plus pension, medical, UIF, workman’s compensation, skills development levy and any fringe benefits the worker or workers receive from the business

It is also important to calculate the productive hours available for the business

Example: Calculation of productive hours available and the labour cost per hour.

The business works 5 days per week.  Working hours are from 07:00 to 16:00 daily.  The worker is off one hour per day for tee and lunch breaks.  The worker receives the following benefits:

  • 3 weeks leave per annum.
  • 11 public holidays per annum
  • 5 days sick leave per annum.

The workers are working at 80% productivity.

Total labour per month of all the workers amounts to R12 213.00

Calculate the productive hours available per year, week, and month.

Calculate a labour tariff per hour.

Actual hours worked per day      =          9 hours – 1 hour for tee and lunch.

                                                    =          8 hour per day

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