Even highly automated processes rely on humans to oversee and contribute to providing customer service or manufacturing a product. Learn how to calculate the total labor content of a product, as well as the cost of that labor.
- [Instructor] Even highly automated processes rely on humans to oversee and contribute to providing customer service or manufacturing a product. In this movie, I will show you how to calculate the total labor content of a product, as well as the cost of that labor. As my sample file, I will use Labor Content and Cost, that's a workbook you can find in the chapter two folder of your exercise files collection. To calculate the labor content and labor cost for a product or service, you need to know the flow rate, which is calculated here in cell B10.
The flow rate is based on a number of other calculations, which I have performed for you in the worksheet. I have a six resource process, and each of those processes takes a certain number of minutes to run. Those values are listed in row five. In row six, I have my capacity per minute, and that is one divided by the time. So if I click in cell B6, you'll see that I'm dividing the value in B5 by one, and that means resource number one can do 0.2 units per minute.
Capacity per hour is simply that minute value, multiplied by 60, 60 minutes in an hour. The process capacity per hour is the bottleneck that is the lowest capacity resource and that is resource number five, which takes eight minutes to run, and has an hourly capacity of 7.5 items. From an outside source, I know that my demand is seven units per hour, and my flow rate is the minimum of three quantities.
The first is the process capacity per hour, the second is demand per hour, and the third is inputs. For simplicity I have assumed that I can get all the input I want, so we're not input constrained, so that means that my calculation uses the min formula to find the lowest value between process capacity and demand, in this case it's demand. With that background information in mind, we can now calculate the labor content and labor cost. Those two quantities are related, but not as directly as you might think.
Calculating the labor content is fairly straightforward. You just add up all of the processing times. So in cell B12, I will type an equal sign, and then sum followed by a left parentheses, and I will select the time in minutes in cells B5 through G5, and type a right parentheses. However, because I have my wage data on an hourly basis, rather than a per minute basis, I want to divide my labor content by 60 so that I can multiply it and get an answer that is expressed in the same units.
So I will divide the sum by 60, press enter. And I see that my labor content is just over half a minute. If I do a quick sum of the values in B5 through G5, and look down at the status bar, I see that the sum is 31, so 31 over 60 is a little over half an hour. So my labor content of 0.51 is accurate. Next there is the labor cost. An easy mistake to make is to just multiply your labor content by your hourly wage to get the sum total of that cost.
The problem is that you are paying your workers whether they are working on a unit or standing idle. That means that you need to divide your total hourly wage by the number of units processed during that hour, and that is your flow rate in cell B10. So to calculate my labor cost, I'll type an equal sign, and I'll find the sum of all of the hourly wages, which are here, in cells B13 to G13.
Note that they correspond to the resources up above, and I will divide that by my flow rate, which is in B10, press enter, and I see that my labor cost per unit is $15.14. Always remember that you need to include idle time when you're calculating your labor cost, but for labor content, you don't need to.
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- Drawing process flow diagrams
- Calculating process capacity
- Identifying bottlenecks
- Determining cycle time and idle time
- Calculating labor
- Calculating utilization
- Analyzing batch processes
- Calculating optimal order quantities