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Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

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9–6. Eliminate Labor Variance Reporting

The cost components of work-in-process and inventory goods will inevitably include some labor. However, the proportion of labor in the total cost mix has dropped markedly over the years, with material and overhead costs now predominating. Nonetheless, the costing reports the accounting staff has traditionally generated are mostly concerned with labor. Examples of these reports are those detailing overtime, comparing actual to standard labor rates or usage, and labor efficiency. By comparison, the reports concerned with the materials expense typically cover only scrap rates and purchase price variances, while many companies have no reporting for overhead costs at all. Hence, most accounting departments are misallocating their time in reporting on the smallest component of product costs.

The solution is to stop reporting on labor variances. The accounting staff will have more time to spend on reports concerning costs that make up a larger proportion of product costs. The problem with this best practice is the remarkable uproar it frequently incites, especially on the part of traditional production managers who were raised on the concept of tight labor cost controls. Thus, the best way to implement this item is to carefully educate the production staff on the following points:

  • Direct labor is really a fixed cost. In many manufacturing situations, ...

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