Standard hour computation is typically used in manufacturing industries as a technique for absorbing overheard costs. When calculated correctly, standard hour costing can help manufacturing companies bid jobs more efficiently. An initial calculation should be done when the business first begins manufacturing, and then again just before the start of each new business year. The figure derived from these calculations, called an annual standard rate, should be used for the entirety of the business year that the data is for. You can compute standard hours quite easily by following the steps below.
Things You Will Need
Estimate of the fixed costs for manufacturing for the entire tax year
List of items that you are manufacturing
Amount of time it takes on average to produce each item
List of how many units of each item you plan on producing for the year.
Calculate the total of all estimated fixed costs for the year. For example, if your rent is $1,000 per month, the standard cost calculation is $12,000.
Calculate the standard hours needed to produce your items using the information in the "Things You'll Need" list. For example: Time required to produce a small train: .4 Planned annual production: 10,000 units Total direct labor hours (number of hours multiplied by the number of units): 4,000
Divide fixed costs by total direct labor hours (12,000/4,000). The standard hour cost for this manufacturing company is $3.00 per item.