A routine analysis of the system costs at a large manufacturing facility discovered that the cost of administering the company's direct labor timekeeping system appeared to be inordinately high. Approximately 50 percent of the entire cost accounting function was devoted to the collection and interpretation of data related to direct labor. The controller asked a cost accountant, Ms. Anna North, to investigate the situation and recommend a revised system that would generate usable information, while costing as little as possible to administer.

It was apparent from the time sheet that each employee must carefully enter a large amount of information during the course of a shift. Also, the information entered by the employee in the example was not easy to read, making it likely that the person who entered this information into the computer would have a difficult time doing so correctly. Further, many time sheets were submitted each day by the 412 direct labor personnel at the facility, some of which were lost by employees or during the data entry process. This information had to be re-created, which could only be done through estimates of the work an employee completed during the period.

Ms. North found that these three issues gave rise to three different types of costs. The first cost was the time required by employees to enter their time worked onto each time sheet and then transport that time sheet to the payroll office for data entry. The second cost was for the data entry staff to initially enter the data into the computer; the third cost was to track down and correct any missing information or to correct data that was inaccurately entered. Ms. North calculated these costs for a typical month in the following manner:

The grand total of all these costs was $29,869 per month, or $358,428 per year.

Ms. North's next task, determining the value of the benefits derived from the timekeeping system, was much more difficult. She found that the number of daily hours worked was used by the payroll staff to calculate and pay weekly wages to the direct labor employees. She described this function as a mandatory one for which the system had to provide sufficient data to calculate the payroll, but she could not ascribe to it a monetary value.

Next she looked at the benefit of tracking hours by job worked. This information was used by the cost accounting staff to develop an income statement for each job, which the sales staff used to revise its pricing estimates for future jobs, to verify that pricing levels were sufficiently high to ensure a targeted profitability level per job of 30 percent. The proportion of direct labor to all job costs was about one-third, so this was considered a significant cost that must be tracked for this purpose. The pricing staff members assured the cost accountant that they frequently altered their pricing strategies in accordance with the information they received through the job income statements. Once again, Ms. North found herself unable to clearly quantify a benefit associated with the tracking of direct labor hours, this time in relation to job numbers, but it appeared that obtaining the information was mandatory.

Ms. North then perused sample time sheets submitted by employees and noted that an average of three workstations were referenced on each time sheet for each job on which work was performed. If she could convince the management staff to eliminate the tracking of time by workstation, she could cut the labor time spent by the direct labor employees on timekeeping by two-thirds, plus similar amounts by the data entry clerks who would otherwise have to enter and correct this information, since these additional entries would no longer have to be made. This worked out to a cost savings of $19,912 per month ($29,869 x 2/3), or $238,950 per year.