F.Y.
BBA – Semester II – Cost Accounting [Academic Year 2024-25]
Module 4: Labour Costing
Introduction:
Labour cost is the second most important element of cost after materials. It represents
human resources used in production. So significant is the role of labour, which productivity
of all other resources depends on the productivity of human resources.
Labour cost is divided into direct and indirect labour.
Direct Labour is the cost of that labour which is expended in altering the construction,
composition or condition of the product. It is directly engaged in production work and can
be conveniently identified or attributed wholly to a particular job, process or cost unit.
Wages of a machine operator is a direct labour cost.
Indirect Labour cost is the wages paid to those workers who are not directly engaged in
converting raw materials into finished products. Such costs cannot be conveniently
identified with a particular job, product or cost unit. Supervisors, inspectors, clerks,
instructors, peons, watchmen and cleaners are examples.
Organisation for Accounting and Control of Labour Cost
There are mainly five departments in an organization which deal with Labour. These are as
follows:
1. Personnel department:
This is a service department and is mainly concerned with the proper selection and
training of workers and placing them on jobs for which they are best suited.
2. Engineering department
This department prepares plans and specifications of jobs, makes job analysis,
conducts time and motion studies, makes provision for safe working conditions and
supervises production activities.
3. Time keeping department:
This department is concerned with recording of workers time. The recording of time
put in by workers is required not only for attendance and wage calculation purpose
but also for the purpose of cost analysis and apportionment of labour cost over
various jobs.
4. Payroll department
This department maintains a record of job classification and wage rate of each
employee and performs the function of computation of wages payable to them by
preparing payroll or wage sheet. It is also responsible for disbursement of wages.
5. Cost accounting department
This department accumulates and classifies all cost data of which labour is one
important element. It analyses the payroll and prepares routine and special labour
cost reports for submission to management so that proper control may be exercised
on labour cost.
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F.Y.BBA – Semester II – Cost Accounting [Academic Year 2024-25]
LABOUR TURNOVER: Labour turnover is defined as the rate in change in the composition of
the labour force in an organization. Labour turnover varies greatly between different trades
and industries, for example part time and seasonal labour will have higher rates.
There are three alternative methods by which labour turnover rate is computed. Once a
particular method is selected, it should be followed consistently.
1. Separation method: This method takes into account only those workers who have left
during the period. Its formula is:
Labour turnover rate = No of workers left during the period x 100
Avg. No. of workers during the period
Average No. = No of workers in No of workers in
The Beginning + the end
2
Multiplication by 100 in the above formula indicates rate in percentage.
2. Replacement method: This method takes into account only those new workers who
have joined in the place of those who have left.
Labour turnover Rate = N o . of workers replaced during the period x 100
Avg. No. of workers during the period
If new workers are engaged for expansion programme or any other such purpose,
they are not considered for this computation.
3. Flux method: This shows the total change in the composition of labour force due to
separations and replacement of workers. Its formula is:
Labour turnover rate = No. of workers left + No of workers replaced x 100
Average No. of workers
Causes of Labour turnover: Labour turnover reports should be prepared regularly to be
placed before the management, giving breakdown of the causes as to why the workers left.
The causes may be classified into two broad categories:
(a) Avoidable causes; and (b) Unavoidable causes
a) Avoidable causes:
i. Low wages and allowances
ii. Unhappy relations with co-workers and supervisors
iii. Unsatisfactory working conditions
iv. Trade union rivalry
v. Lack of medical facilities
vi. Inadequate job security and retirement benefits
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F.Y.BBA – Semester II – Cost Accounting [Academic Year 2024-25]
b) Unavoidable causes:
i. Death or retirement
ii. Illness or accident
iii. Domestic problems
iv. Discharge on disciplinary grounds
v. Seasonal nature of business
vi. Change in plant location
vii. Personal dislike for job or environment
viii. Marriage – particularly in the case of women workers
ix. Change of job for betterment
Effect of Labour turnover:
Labour turnover can also be beneficial at certain times particularly in lower management
level as it creates vacancies for internal promotions which acts as a motivation for young
workers. On the other hand, labour turnover should be minimized because it leads to
increased cost of production.
The cost of production can be classified into two types as explained below:
Preventive Costs: These are the costs which are incurred to keep the work force satisfied
and to prevent or discourage them from leaving the organization
Replacement Costs: These are the losses and wastages arising because of inexperienced
new labour force replacing the existing one as well as the cost of recruitment and training of
the new workers.
Cost of labour turnover should be based on number of workers in each department. But in
case the cost is on account of a particular department then it should be charged completely
to that department.
IDLE Time: Idle time represents the time for which they are
paid but no production is obtained.
Example: time when production is interrupted by machine
break down, tea breaks.
It can be due to following causes:
Productive causes: Idle time due to machine break down, power failures, waiting for
raw materials or tools, waiting for instructions.
It can be controlled by proper planning, supervision & maintenance.
Administrative causes: Idle time caused by administrative decisions like
underutilization of plant capacity during depressions. It is generally not controllable.
Economic causes: Idle time due to seasonal nature of certain industries like woollen
goods, ice cream where production is not evenly distributed over the year. Labour
remains idle in this slack season. Sometimes this idle time is beyond control.
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F.Y.BBA – Semester II – Cost Accounting [Academic Year 2024-25]
Treatment of Idle Time:
Normal Idle Time: This is that wastage of labour time which cannot be avoided and has to
be borne by the employer. (tea break, rest intervals, time spent on setting of machines etc.
It may be treated as:
As Fixed overheads (for indirect labour).
As direct wages (for direct labour).
Abnormal Idle Time: This is that idle time which arises due to reasons not connected to
normal production. (Strikes, accidents etc.)
It is not included in cost and is transferred to costing P&L account.
Methods of remuneration:
Time Rate System
Wages = No. of hours worked x rate per hour
Piece rate system
Wages = No. of units produced x rate per unit
Incentives Plan
Halsey Plan
Bonus = 50% of (Time saved x rate per hour)
Total Earning = (Time taken x rate per hour) + Bonus
Rowan Plan
Bonus = Time saved x Time taken x Time rate
Time allowed
Total Earning = (Time taken x time rate) + Bonus
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