Planning and Controlling Direct Labor Costs Essay

Planning and Controlling Direct Labor Costs - Essay Example In the current competitive business environment, companies that cannot afford to charge low prices on their products are likely to be excluded from markets. In this regard, cost cutting allows firms to employ low pricing strategy and still make profits (Burns, Quinn, Warren & Oliveira, 2013). Business costs come in many forms. As noted by Burn et al. (2013), manufacturing companies incur expenses in acquisition of raw material and labour among other things. Sometimes it is not easy to assess the value contributed to the company’s product or service by the expenses incurred. According to Burn et al. (2013), many firms find it hard to assess actual contribution of their employees to their products. In this regard, planning and control of direct labour costs is one of the most challenging tasks for businesses. This paper discusses direct labour costs in relation to a soda ash mining company called Tata Chemicals Magadi. Importance of the study Tata Chemicals Magadi has been exper iencing financial difficulties in the recent years. As a result, the company hired an expatriate in May this year to help streamline its operations. After analysing the company’s operations, Paul Patterson (the expatriate) asserted that the Magadi’s financial problems were mainly caused by poor planning and control of labour costs. He therefore proposed a plan to improve labour efficiency. He took office in July 2013 but his progress has never been assessed until today. This study aims at determining the extent to which Patterson has been successful in streamlining the company’s direct labour costs. The specific objectives include: (1) determining actual contribution of individual employees to product output in the months of September, October and November. (2) Reconciling variances and providing information that will help the company to properly plan and control its direct labour costs. (3) Enhancing maximum output from employees. Analysis Direct labour cost co mprises of human resource expenses that goes directly to processing of products or provision of services (Horngren, Datar & Foster, 2003). In a manufacturing set up, direct labour cost would be the expenses incurred in form payment of wages and other benefits to employees who are directly involved in product manufacturing (Horngren, Datar & Foster, 2003). In this regard, as pointed out by Horngren et al. (2003), benefits may range from house allowance, transport allowance, medical cover, social security contribution and workmen’s compensation insurance among other things. This excludes labour expenses related to administrative functions such as accounting, human resources and purchases departments. Some functions in manufacturing department such as supervision and other overhead costs are not part of direct labour costs (Horngren et al., 2003). Tata Chemicals Magadi mines and dries soda ash from Lake Magadi before packaging and transporting to the market. In this case, direct labour costs comprise of wages and other benefits enjoyed by employees who are directly involved in mining and drying of soda ash. There are seven plant operators in charge of mining machines and 22 in charge of driers. In addition, there are 6 drivers who operate tracks that transport wet ash from the lake to the drying plants 4 in charge of front-end loaders at mining