How to Calculate Standard Minute Rate (SMR)?

SMR rate calculation

The current apparel manufacturing sector is very competitive. Knowing how to cost a new style accurately is a crucial skill. Being able to cost a product accurately within any given time, gives the edge to anyone who is engaged in negotiating orders and prices. The production cost of a design can be estimated from its standard minute rate.

SMV is the widely agreed method to calculate the required time to complete a task. There are a lot of literature written over the years to explain what the Standard Minute Value (SMV) is.

The other closely followed unit calculator is the Standard Minute Rate (SMR). Some authors use the term Cost per minute which is essentially another term for SMR. However, the amount of literature written on this area is limited, and as a result, there are many definitions which leads to a certain amount of confusions.

Calculate Standard Minute Rate (SMR):

In most cases, a lot of writers describes Standard Minute Rate as the labor cost of the product. For example, if you want to calculate the cost of a certain production line, it is done as below

Standard Minute Rate (SMR) = The daily cost of the wages / (Available minutes x efficiency)Let's look at an example. Let’s say we have eight operators paying $10 per day. 2 helpers paying $10 per day. Let's say this particular line usually works 8 hours per day. Average efficiency of the line is 50%. Typically, most companies calculate SMR as below.

Daily total wages = (8 x $10) + (2 x $10) = $100
SMR = $100/(480x10 x 50%) 
= $ 0.04

In this example, line standard cost per minute is $0.04

Let's see how the SMR used in a real-life example.

Average SMV of a Men’s POLO T-shirt is 12 minutes. To determine the CM, a costing merchandiser would simply use below equation.

Cost of manufacture (CM) = (Product SMV x Standard minute rate (SMR))
CM = (12 x $0.04) = $0.48 Polo T-shirt CM

However, this is not reflecting the actual cost of the product.

We need to be conscious of all costs associated with running a production manufacturing plant.

There are many overheads involved in running a manufacturing operation. Some of them include electricity, water, wear and tear of machinery, Phone bills and so on. Also, there is indirect labor such as your Tea lady, a lorry driver who takes garments for washing and back. Electrician and so on. Don’t forget the endless number of managers who earn big bucks. They don’t fall under direct labor but must be paid with the money earned through the production coming out of the lines.

Now, another important area to focus on is the cutting and packing. In many instances, these two departments are not taken into consideration when calculating either SMV or SMR. Often SMV is calculated only for the sewing lines. This is incorrect. It is important to calculate SMV of cutting as well as packing departments. Same goes when calculating SMR as well. These departments cost should be added to the overall cost, proportionately. If not, you will find a huge loss when conducting post costing.

Related post: How to Calculate Standard Hours Earned, Operator Efficiency and Labour Cost?

Calculate Standard minute rate (SMR) including indirect labor cost and factory overhead

The issue is many companies only do pre-costing and don’t even think about doing POST COSTING. Due to the nature of the business, many apparel companies see substantial sums of revenue keep coming into the bank, so the real impact is not necessarily felt immediately. When they do, it's too late to fix.
So, the new equation goes as below

Minute cost (SMR) = (Direct labor + Indirect labor + Overheads)/ (Available minutes x efficiency)Let’s look at the same example again with the new equation:

Direct labor = $100
Indirect labor (10% of direct labour) = $10
Overheads (5% of direct labour) = $5
Efficiency = 50%SMR = ($100+ $10 + $5)/ (480x10x 50%) = $0.05
CM price of Polo shirt = 12 SMV x %0.05 = $0.60

From the above calculation, we got a different cost of the Polo shirt. As you can see, there is a $0.12 ($0.60 - $0.48) loss if we don’t cost accurately

To be noted that there is no standard ratio agreed by all engineers and scholars universally, on the correct amount of direct labor to indirect labor. Best manufacturing plants get closer to 4 to 1 but this is subjective depending on the product type and the factory set up. Evidently, the systems in place such as lean management tools and the degree of automation also have a direct correlation towards the direct and indirect labor percentage. For this example, I used 10% of indirect labor to direct labor and 5% of overhead.

Related article: The need for open labour costing in apparel sourcing business

Charm Rammandala

Dr. Charm Rammandala currently works as the Sustainable Program Manager at Apple Inc. USA. He has over 20 years of international management experience and previously contributed his expertise at Tesla, George Sourcing, and Vomax LLC.

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