How to Justify a Direct Labor Rate
Direct labor is the portion of labor costs that a business spends compensating the personnel that run its production processes rather than its administrative and other supporting functions. Depending on the business in question, direct labor is one of the three main production costs alongside material and overhead costs. Since controlling production costs enables businesses to earn higher incomes, businesses are incentivized to set a direct labor rate that reaps them maximum benefits at minimum cost. This incentive is in direct opposition to that of its hired personnel. Research is needed to defend either position.
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Instructions
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Choose the position to defend -- either that the current direct labor rate should remain as it is, should be raised, or should be lowered. For example, if a business has set an $18-per-hour direct labor rate, an individual can choose to argue that the rate should either remain $18, increase or decrease.
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Compare the direct labor rate of the position to those of other positions at other businesses requiring the same education and experience. For example, if similar positions requiring the same qualifications set an average of a $20-per-hour rate, it is reasonable to conclude that the same person in a similar position requiring the same qualifications should earn the same. Using the same example, an individual who is arguing that the $18 rate should be raised can use the $20 average as an argument while individuals arguing other positions will need to find mitigating circumstances in order to justify their preferred rates.
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Examine the business's particular circumstances and performances in past time periods to see if there are factors that can be used to defend or attack its direct labor rate. For example, if the business has been earning poor profits for a number of years and seems to be teetering on the edge of disaster, an individual arguing for its $18 rate might be able to use the argument that the business isn't able to raise the rate to one comparable to other businesses.
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Examine the environment in which the business operates -- such as the state of the economy, the state of the industry, rules and regulations, competitors, and opportunities. For example, if the business is operating during a prolonged recession and the businesses that offer a higher direct labor rate belong to an unrelated industry that is doing well despite the state of the economy, an individual arguing for the $18 rate can use that to excuse it being lower than the $20 average for similar positions.
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Collect and compile information in order to prepare a defense of the position being advocated. Prepare a list of argument supporting your position and then be ready with the evidence that supports each of those arguments. An attempt also should be made to anticipate possible counterarguments and prepare to defend against those beforehand.
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References
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