Labor routing definition
/What is a Labor Routing?
A labor routing itemizes the estimated amount of labor that will be required at each production workstation in order to complete a product. A labor routing is typically compiled for any product that is to be manufactured on a recurring basis. Routings can be used in the ways noted below.
Labor Budgeting
Labor routings can be multiplied by the number of products to be produced in order to estimate the total amount of labor that will be required within a certain period of time. This results in only a rough estimate, since the actual headcount is not completely variable with the number of units to be produced. Instead, a certain minimum staffing level is needed for most workstations, irrespective of production volume.
Cost Accounting
Labor routings can be used to calculate the value of inventory contained within work-in-process and finished goods inventory, which can be used within a standard costing system to place a value on ending inventory for the financial statements.
Efficiency Analysis
Labor routings can be used to set a baseline amount of labor hours that will be needed, which can then be compared to actual hours incurred to develop a labor efficiency variance. However, the results are only useful if the underlying labor standards are reasonable.
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Labor Routing Best Practices
There are several best practices associated with how labor routings are constructed and used. They are as follows:
Need to re-evaluate. The amount of labor required to manufacture goods will change as volumes go up, since this triggers the experience curve. Under the experience curve concept, costs decline by a certain percentage every time that the production volume doubles. Thus, re-evaluate the routing numbers if production volumes change substantially.
Evaluate in real time. The amount of labor devised by an industrial engineer (the usual author of a labor routing) may not match actual experience on the shop floor, especially across all three shifts. For example, the labor usage per unit tends to increase in the second and third shifts. This can result in different labor routing amounts, depending on the circumstances.