Direct Labour Productivity:

Measures like these emphasize at generating output, whether or not demand warrants it. Prime endeavour is on quantity at the costs of quality, customer service, and accumulation of inventory. Therefore, increasing a department's inventory is equivalent to increasing its earned revenues.

Overhead Allocation and Direct Labour

Overhead costs that may not be associated directly with specific outputs are allocated to products. These costs include administrative, staff, and plant expenses for management, research, engineering, utilities, marketing, maintenance, and depreciation as well as capital expenditures for equipment and facilities. Such costs are allocated throughout the organization, commonly as a percentage of every direct labour hour charged. Mathematically specking, the computation can be

Total Labour Rate = Direct Labour Rate × (1.0 + Overhead Rate)

For instance, if the direct labour rate is Rs. 30/hr and the overhead rate is 500%, then

Total Labour Rate = (Rs. 30) (1.0 + 5.0) = Rs. 180/hr.

This method of allocation compels the managers to decrease labour cost first. In the process of decreasing labour, the ratio of overhead to direct labour costs increases throughout the organization, requiring that other areas also look for ways to cut costs. It is worth noticing that this allocation technique puts efforts on reducing labour instead of reducing overhead.