Labour cost allocation is one of the common topics that come up during my conversations with both existing customers and new prospects. Just as a point of observation, this topic came up more often for clients in the food and beverages/retail industry or companies that perform a lot of project-based work.
Why is labour cost allocation important?
According to economist Milton Friedman, the main purpose of a business is to maximize profits for its owners. There are 2 main ways of increasing profit: Improving revenue and reducing costs.
For effective cost control, business needs to be able to identify all the costs associated with running the business. Effective cost monitoring gives business the clarity over their business cost and helps them stay within their operating budget for the given financial quarter or fiscal year.
According to Chron.com, one of the top newspaper websites in the United States, manpower costs is one of the top 5 business expenses faced by all businesses. It can be challenging to try to allocate manpower costs accurately as staff can be multi-tasking among different job functions or projects.
How can AGHRM help?
Below is an overview of AGHRM cost allocation model.
I will be covering these 2 methods in more details in the section below.
AGHRM Cost Allocation
AGHRM supports 2 types of cost allocation method:
Below is a sample screenshot of a career record.
Below is a quick illustration of how this cost allocation would work.
Assume that there are 2 employees who are paid salary. Below are the stated assumptions.
Based on the assumption above, the cost of these 2 employees will be charged as illustrated in the table below.
In terms of the cost allocation report, the system will generate the following result
There is 2 type of labour costs:
In AGHRM’s context, we associate the direct labour costs for work done in a specific work location based on the no. of hours that the employee works in the specific work location.
To track the number of hours that an employee works in a work location, we leverage on AG Attendance. Below is an architecture overview of AG Attendance.
AG attendance uses a variety of devices to automate the tracking of the actual hours that each employee spent at the individual work location. There are 2 main types of devices that AG Attendance supports:
For more details about AG Attendance, click here.
How does it work?
Assume that John has worked a total of 25 hours of overtime this month and he has been paid $500 for this overtime work. Below is a breakdown of the overtime hours.
Cost allocated to Work Site =
[No. of work down in specified worksite] / [Total no. of work done] X [Total Pay Amount]
Using Work Site A as an illustration, below is the parameters for Work Site A cost allocation.
[No. of work down in specified worksite] = 10
[Total no. of work done] = 25
[Total Pay Amount] = $500
Cost Allocated to Work Site A = 10/25 X $500 = $200
Below is the table for the costs allocated to Work Site A,B and C.
An example of this would be Long Service award where the cost centre is normally HR department instead of the work location.
An example of this would be Transport allowance where it would be costed based on percentage distribution.
Once the cost has been allocated based on the customer’s policy, the system can then generate reports as well as general ledger interfaces to various financial systems. Below is a sample screenshot of a GL report.
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