How to Compute Standard Hours

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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.

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.


About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.

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