Making sense of Standard Hours - Work an employee can be expected to do in an hour

[RosieA]

I'm working for a company that uses a metric called standard hours. It's a measure of the work an employee can be expected to do in a normal hour and is used, among other things, to allocate overhead expenses. I've never worked anywhere where this standard was used. More typically I've seen things like sales dollars per employee or productivity per employee.

I figure reject and scrap dollars on a monthly basis for management review meetings. I've been reporting this year vs. last year, but need to equalize that for differences in volume. The Plant Manager would like me to figure the reject and scrap rates by standard labor hour, and I want to compare them to dollars shipped.

I don't understand what value there is in knowing dollars of rejects per hour. It seems that dollars of rejects against dollars shipped would give me a rough idea of first pass yield and scrap dollars vs dollars shipped would give me a rough idea of final yield. (we do not do a final inspection so I have no reliable way to know outgoing quality levels)

Can anyone help me understand what knowing the number of dollars per hour of rejects does for me?

 

[Jim Wynne]

I'm working for a company that uses a metric called standard hours. It's a measure of the work an employee can be expected to do in a normal hour and is used, among other things, to allocate overhead expenses. I've never worked anywhere where this standard was used. More typically I've seen things like sales dollars per employee or productivity per employee.

I figure reject and scrap dollars on a monthly basis for management review meetings. I've been reporting this year vs. last year, but need to equalize that for differences in volume. The Plant Manager would like me to figure the reject and scrap rates by standard labor hour, and I want to compare them to dollars shipped.

I don't understand what value there is in knowing dollars of rejects per hour. It seems that dollars of rejects against dollars shipped would give me a rough idea of first pass yield and scrap dollars vs dollars shipped would give me a rough idea of final yield. (we do not do a final inspection so I have no reliable way to know outgoing quality levels)

Can anyone help me understand what knowing the number of dollars per hour of rejects does for me?

Just a guess, but it could be someone is looking for a way to justify something having to do with wages, and then perhaps use it as an "incentive." If this is the case, then some one needs to see the red bead thing.

 

[RosieA]

And that may well be it. Two of the three divisions under this roof work on incentive.

Tell me how you came up with that, JSW05. I think I lack some basic understanding on this standard hours thing.

 

[ralphsulser]

I have not been involved in that type calculation or result since I have been in the quality profession. I have been involved in using standard cost of manufactured goods versus Sales dollars. Meaning the actual costs of producing products with out the addition of sales margin. It will always be a little less than scrap as % of the cost of sales then, and more accuratly reflect the standard costs including fixed and variable overhead.
Sorry can't help with this.

 

[Jim Wynne]

And that may well be it. Two of the three divisions under this roof work on incentive.

Tell me how you came up with that, JSW05. I think I lack some basic understanding on this standard hours thing.

I'm about as ignorant about cost accounting (and accounting in general) as it's possible to get, but I can smell a rat a mile away. I think your initial impression that it didn't make sense was accurate, so when someone does something with money that doesn't make sense, it's best to just follow the trail of rat droppings wherever it leads. Now mind you, I could be totally wrong and there could either be a legitimate reason that we're not aware of, or someone with too much authority and not enough knowledge is innocently groping around for a way to do something clever.

 

[Wes Bucey]

Depending on who is using the term "standard hour" and whether the actuality of implementation meets the definition,

A "standard hour" is either an important aspect of a LEAN organization or an almost outmoded cost accounting "fiction."

Here is an excerpt from a case study about Lean activity.

Step Two: Adopting Standard Work
Another factor was the mind-set of the two workforces. Cessna’s employees worked under an operational metric known as standard-hour attainment, which is developed around the traditional standard costing idea that production areas are cost centers. This approach dictates a process of absorbing overhead costs through attaining standard hours of production. The metric is intended to measure the department or work center’s productivity.

Developed by industrial engineers who performed time studies on each job, the metric is the ratio of actual production time as compared to the job standard. But this traditional metric is plagued with problems. First, the operator knows the most about how to perform the job but doesn’t determine the best method to do the work. Second, the operators, who are being observed as the time standards are set, may be concerned that the resulting standards may be too tight to allow adequate time to react later if there’s a problem or defect while performing the task. These concerns can lead to padding so don’t reflect the actual work content accurately. Third, the standards may become incorrect over time if they aren’t adjusted or reset when process improvements are made. Over time, these standards have a high degree of variation from actual times that creates issues related to capacity and manpower requirements used in the production planning process.

In a lean enterprise, however, the operators own the process and define the best method or “standard work” for each task by eliminating unnecessary steps, motions, and sources of delays. Reaching this point requires a fundamental paradigm shift in the way companies do business. So how do you make the shift?

Standard work requires teaching operators how to improve their work by breaking down each activity to its most elementary tasks, with the objective being to identify and eliminate any nonvalue-added tasks and to develop the best work patterns. Matt Kraft, Cessna’s director of lean, says, “The operators have learned this tool and are driving improvements. Through standard work, they have the skills to identify and reduce process variation. We’re beginning to see operators achieve initial productivity gains of 20%-30% as they establish standard work patterns.”

 

[nickh - 2011]

Even if standard hours are an outmoded cost accounting metric, every MRP system I've used had standard hours for each product. Perhaps the newer MRP/ERP systems track cost differently, but there are tons of small to medium sized businesses still using older systems.

That said, I wouldn't get too excited about it. Let's say you've got a standard hours in your system, then tracking the amount of scrap / hour may just be a way to normalize the data to some degree.

It may not be the best metric, but if the manager is looking at standard hours versus actual hours, he/she may just want a way to track all the sources of variance in their costing model. Plus, there's the old adage that if you want to improve something, start measuring it.

 

[nickh - 2011]

By the way, why didn't you just ask the Plant Manager. To me, an unapproachable Plant Manager seems like the scariest factor in this quandary.

 

[RosieA]

By the way, why didn't you just ask the Plant Manager. To me, an unapproachable Plant Manager seems like the scariest factor in this quandary.

I don't disagree with you there, Nick! It's not that he's unapproachable, but this is a company of lifers...he like many other managers have been here forever and have always done it this way. I've been here about 9 months and while I brought a ton of experience with me, I'm finding that the Plant Manager is very resistant to change. I've had better luck one level down with the Production Manager, but even there, standard hours rule.

Wes, thanks for the two definitions of standard hours. That was helpful in understanding how I might use what we have to further enhance our Lean program.

I'm going to share both the rejects per standard hour and rejects per dollars shipped next week in a management review meeting. I'll let you know how it goes.

 

[wmarhel]

Depending on who is using the term "standard hour" and whether the actuality of implementation meets the definition,

A "standard hour" is either an important aspect of a LEAN organization or an almost outmoded cost accounting "fiction."
.

"Standard Hour" has more to do with the cost accounting function than Lean. "Standard Hour" is used to calculate labor variance as follows:

(AH x AR) - (SH x SR) = TLV

Where:
Actual Hours = AH
Actual Rate = SR
Standard Hours = SH
Standard Rate = SR
Total Labor Variance = TLV

A standard hour is the time that should have been taken to complete the period's output. A standard hour per unit is the amount of labor time that would be required to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies.

This would then be used in determining labor price variances.

The reason that this term is still found in the various MRP/ERP systems is because those systems are still primarily working off the cost accounting method.

From the lean perspective, the standard work would produce a consistent amount of labor required per unit (ie, standard hours per unit). One key difference though is that the number is much more dynamic. When a variable such as standard hour is changed in the cost accounting method it can cause problems because the overhead absorption rate has now changed. From the lean side, it is what is, now how does one go about reducing the amount of time. Standard work is about performing all the elements that go into a particular job or operation.

Lean and the cost accounting method are pretty much at odds with one another and it takes some tweaking to make them compatible with one another. It is really hard for some accountants to make that leap, and even hard to get them to adjust the way they report financials.

The article segment wasn't bad, I just don't think they should have tried to draw any similarity between cost accounting's "Standard Hours", and lean's "Standard Work". The concepts are a world apart when viewed in their own little worlds.

Wayne