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This category is a one time entry of a constant, updated annually, exported from your existing computer systems. Your existing method of calculation need only meet the TDC recommendations below. As with all labor categories, cost should be net cost (insurance, SSC, benefits, etc.), not just base salary.
LPP / Equipment Contribution is not as accurate as using individual TDC labor categories, but can be used in place of them if LPP includes indirect labor. In most cases, LPP (also called Labor Per Unit, LPU) is calculated using only the direct labor cost.
The cost per unit is normally used for external reporting only, not management decision. This is because that figure is made up of vague estimates of material, labor, and overhead cost. Even looking at just the labor calculation from cost per unit, will not result in a true cost. One need only take a closer look at how accountants derive this figure.
Direct labor (operator) X 30% fringe benefits
TDC LPP Direct labor (machine operator) X 30% fringe benefits
QC labor X 30% fringe benefits +
Management labor X 30% fringe benefits +
Maintenance labor X 30% fringe benefits +
Engineering labor X 30% fringe benefits +
Material Handler labor X 30% fringe benefits +
A product routing shows every step a product goes through in the manufacturing process, which includes labor times for each step. The accountant uses these direct labor times to estimate the labor time required to make the product. These labor hours do not include all the support personnel labor that goes into making the product, and support is not usually included in the overhead factor either.
The above method of calculating LPP typically does involve a multiple for fringe benefits that amount to 30% of the hourly wage for example. But for the sake of monitoring and analyzing labor cost in relationship to TDC, QC, Management, Maintenance and engineering must be considered as well as direct labor (machine operator).
Even something originally thought as trivial such as delivering raw material to the machine after repaired can add up over a years time. For decision making, labor per product should be a variable dependant on your OEE. Carefully examine the existing LPP information to see if you labor estimates are a variable. Don't use it if it appears it really is a fixed cost, use the individual labor categories mention above.
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