Idle time is when workers are paid for unproductive time due to some causes that may or may not be under the control of management. Idle time is typically paid to full-time laborers rather than indirect workers compensated based on the number of hours worked.
Further, the business needs to control idle time as there is a direct impact on profitability. For instance, if there is more idle time, the business may not attain its full potential. On the other hand, controlling idle time makes the business more productive, attaining the full business potential and achieving higher profitability.
This concept is more applicable to the manufacturing and service sectors dependent on the resources to complete the sale cycle. On the other hand, the impact is limited on the other sectors like financing, leasing, and trading, etc.
Causes of idle time
- Machine breakdown – A breakdown in the production facility may result in a work stoppage, and it will waste workers’ time and increase the labor cost.
- Shortage of Vital direct material – An idle time may occur when there is a shortage of key raw material. It will waste direct workers’ time unless the new delivery from the suppliers is received.
- No customer orders- A company is committed to paying its direct workers even if it has not received any order to deliver goods/services. It means that an entity must pay its direct labor cost even if the workers are not doing substantial work because of not enough orders from customers.
- Nature of task– Sometimes, the nature of a task to be performed by laborers is such that idle time is unavoidable, and that’s why an allowance for idle time is incorporated in standard cost cards.
Examples and types of idle time
Idle time may occur when the employees wait for a shipment to reach a company’s premises to start their work or when the company has hired more staff than the required number of people. The company has to bear the extra cost when an idle time appears in the production process.
Idle time is generally classified into two categories.
1. Normal Idle time
The time wasted due to the regular repair and maintenance of a system is an example of normal idle time. It is also labeled as downtime for manufacturing machines and is a part of normal business operations. The management may not be able to control this type of idle time.
The cost of such idle time is included in the cost of the product. Hence, it’s considered an inclusive part of the manufacturing process and expensed via the cost of sales on sale of the product. The logic behind the concept is that it’s a normal expense, and a product cannot be produced without incurring such expenses.
2. Abnormal idle time
Abnormal idle time is when laborers’ time is wasted due to some unexpected event. Typically, these events are not expected to occur. So, these are not always going to occur. So, these are not part of the product costing and are not included as well.
Following are some of the examples of abnormal idle time.
- Failure of the production facility leading to production stoppage.
- Strike of the labor.
- Electricity problem leading to stoppage of production.
- Flooding in the production area.
- Machine breakdown.
The expense incurred on such idle time is directly charged as a separate line item in the income statement. It leads to an increase in expense and a decrease in business profitability.
The formula for calculating idle time is as follows,
To calculate the idle time for a production process, simply subtract actual working hours from standard hours allowed for production. The difference between these values is Idle time.
Idle time = Available time for production – Actual time for production
Idle time- A part of Standard Costs
Idle time can be included in current standard costs when waste in the production process is expected and idle time is faced regularly. It’ measured by recording the actual hours lost due to the idle time of workers. There are two ways of making idle time a part of standard costs.
This method computes the total standard cost per unit by including idle time as a distinct element of the standard cost.
This method allows for a standard portion of idle time in standard hours per unit of manufactured goods. It means that the standard hours per unit also incorporate an allowance for anticipated idle time.
Let’s explain these two methods with the help of an example.
A company manufactures Alpha products. The nature of the production process is such that idle time is expected, and the normal amount of idle time is expected to be 20% of the hours worked.
The standard time to make one unit of product alpha is 0.36 hours. The payment rate hour of labor is $10.
It means that to produce one unit of product Alpha; the labor time will be:
Labour time = 0.36/0.8
Labour time = 0.45 hours
Idle time = 0.45-0.36
Idle time = 0.09 hours
Calculations under Method 1
This method includes idle time as a separate element of the standard cost. The standard costs per unit of product Alpha are calculated below:
|Active hours worked (0.36 hours*$10 per hour)||$3.6|
|Idle time (0.09 hours* $10 per hour||$0.9|
|Standard costs per unit of Alpha||$4.5|
Calculations under Method 2
Under this method, an allowance for expected idle time in standard hours per unit of product Alpha is included.
Standard cost=0.45 hours *$10= $4.5
How to control idle time
Although, idle time cannot be eliminated. However, taking certain steps can help to reduce idle time leading to higher production and profitability. The steps include but are not limited to the following,
- Create more balanced working schedules for the workers.
- Reduce excessive bureaucracy in the form of approval and other administrative tasks.
- Analyze and improve the efficiency of routine tasks.
- Ensure employees are provided with the quality tools to complete the work.
- Draft and circulate standard operating procedures for the flow of production.
- Make sure to draft production flow in a way to enhance profitability.
- Appoint experienced and technical maintenance staff to ensure an unproductive time of machine can be minimized.
The term idle time is used when the business has to pay for unproductive labor hours. It’s the cost for business without adding any value to the business. Sometimes, the nature of idle time is regular, and it’s part of normal business operations. Hence, it’s included in the cost of the product manufactured. For instance, idle time due to machine maintenance is classified as normal idle time.
On the other hand, sometimes the business incurs an accidental cost for idle time, which is not usually expected. Hence, it’s directly charged in the income statement. For instance, idle time due to a worker’s strike/natural disaster can be classified as abnormal idle time.
Frequently asked questions
What is the impact of idle time on business operations?
Idle time hurts business operations, and it leads to production delays and decreased production efficiency. Sometimes, it can be hazardous and lead to serious impacts on the going concern status of the business.
When idle time becomes part of the product costing?
Normal idle time is included in the product costing. This type of idle time is considered essential for product manufacturing. Hence, it becomes part of the product costing and is charged when sold in the income statement. Further, this type of expense remains in current assets till the sale of the inventory.
Is idle time controllable by the business?
The controllability of idle time is dependent on its nature. For instance, idle time arising because of machine hours can be minimized by increasing maintenance efficiency. On the other hand, some idle time like longer power failure does not seem to be in the control of the business.
Can we classify tea breaks of labor as ideal time?
If the production is halted due to a tea break, it can be classified as an ideal time. Further, tea break seems to be a normal business activity, so it should be classified as normal idle time.