Session 7

 Labour cost is a second major element of cost.

 Proper control and accounting for labour cost is one of

the most important problems of the business enterprise.

 The human element in labour makes difficult the control

of labour cost whereas materials, being inanimate in
nature, could be subjected to a rigid control.

 Labour once lost cannot be recoupled and is bound to

increase the cost of production.
 Can be classified into:
 Direct
 Indirect
 Direct labour is that labour which is directly engaged in
the production of goods or services and which can be
conveniently allocated to the job, process or commodity
unit.
 For example, labour engaged in making the collars of a
shirt is direct labour. Charges paid for making 1000
collars can be conveniently allocated to the cost of 1000
collars.
 The portion of wages and salaries which can be
identified and charged to a single cost unit.
 It is that labour which is not directly engaged in
the production of goods or services but which
indirectly helps the direct labour engaged in
production.

 Cannot be directly related with the production

of specific goods or service

 Foreman, storekeeper, clerical staff etc. are

examples of indirect labour cost
 It represent the various items of expenditure
incurred on workers by the employer and
would include the following:

A) MONETARY BENEFITS :
1. Basic wages
2. Dearness Allowance
3. Employer’s Contribution to Provident Fund
4. Profit bonus
5. Old age Pension
6. Production bonus
7. Retirement gratuity
B. FRINGE BENEFITS OR LABOUR RELATED COSTS
:

1. Subsidised Food
2. Subsidised Housing
3. Subsidised Education
4. Medical Facilities
5. Holidays Pay
6. Recreational Facilities
 It is an important objective of management.

 From functional point of view, control of labour

costs is effected in a large.

 Industrial concern by the co-ordinated efforts of

the following departments:
1. Personnel department
2. Engineering department
3. Rate or time and motion study department
4. Time keeping department
5. Pay roll department
6. Cost accounting department
 With the help of various departments supervisors
and heads is responsible for the execution of
policies regarding the recruitment, discharge
classification of employees and wages which
have been laid down by the Board of Directors or
a committee of executives.

 Main functions are:

1. To recruit workers
2. Train them and
3. Place them to the jobs they are best fitted
 The submission of various reports to the top
management such as Weekly reports, Labour
turnover, Labour productivity, accidents,
disciplinary action, idle time, overtime, casual
workers etc is also considered to be the most
important function of personnel department.
 Labour turnover denotes the percentage change in the labour
force of an organisation.
 High percentage denotes that labour is not stable and there
are frequent changes.
 The definitions of labour turnover are given below :
1. Labour turnover according to separation method
= __Number of Employees left during a period__ x 100
Average number of employees during a period
2. Labour turnover according to flux method
= Number of additions + separations during a period x 100
Average number of employees during a period
3. Labour turnover = No. of additions + separations/2 x 100
Average number of employees
4. Labour turnover according to replacement method
= ___No. of workers replaced during a period __ x 100
Average number of employees during a period
 This department is required to maintain control over
working conditions and production method for each
job and department by performing the following
functions:
1. Preparations of plans and specifications for each job
schedule for production.
2. Inspection of jobs at success stages of production to
make sure that jobs are being done according to plans.
3. Inspection of jobs after they are completed to insure
they are satisfactorily completed .
4. Maintaining safety conditions
5. Maintaining good working conditions
6. Conducting research and experimental work before
under taking new jobs
 This department works in close harmony with
the personnel , engineering and cost
departments.
 This department performs the following
functions :
1. Making of time and motions studies of labour and
plant operations.
2. Making job analysis
3. Setting piece rates.
 This department is concerned with the recording of
time of each worker engaged in the factory.
 The recording of time is for two purposes i.e for
Time keeping and Time Booking.
 Time keeping is concerned with the recording of
time of workers for the purposes of attendence and
wage calculations whereas time booking is the
reporting of each worker’s time for each
department, operation and job for the purposes of
cost analyses and apportionment of labour costs
between various jobs and departments .
 The important activities of the pay roll department
in controlling and accounting for labour costs are
as follows:
1. To maintain a record of the job classification, department
,and wage rate for each worker.

2. To verify and to summarise the time of each worker as

shown in time cards .

3. To calculate the wages of each worker.

4. To prepare the pay roll or wages sheet for each

department .

5. To maintain a permanent payroll record for each

employee to distribute wages and salaries.
 The cost accounting department is responsible
for the accumulation and classification of all
labour costs.

 This department uses time cards, job cards and

pay rolls for the calculation of the labour cost of
various jobs, work orders, processes etc.
 The cost accounting department prepares the
wages abstract in order to determine the direct
labour costs, indirect labour costs, department
labour costs and difference between the budgeted
labour costs and the actual labour costs and to
inform the management of the effectiveness of its
labour policies.
 Remuneration on time basis
 Remuneration on piece work
 The wages is measured on the basis of unit of
time i.e. hourly, daily, weekly or monthly

 The formula is as follows:

Earnings = Hours worked * rate per hour
 If a worker is paid $10 per hour and has spent 300
hours during a particular month in a factory, his
wages will be 300*$10 = $3000
 It is simple and easy to calculate

 It provides a regular and stable income to the

worker and thus creates a sense of security

 It is beneficial to the average as well as the below

average workers

 It avoids many complex negotiations in case of most

of the incentive schemes
 This leaves no incentive for an efficient worker.

 An inefficient as well as efficient workers are paid the

same wages under this method

 In absence of incentives and schemes, a stricter

supervision becomes necessary for ensuring the required
level of output from the workers

 Since the orders are certain about their wages they may
consume more time for producing the same quantity. It
means a higher level of labour cost and a higher level of
overhead
 The quality of work is more important than quantity

 The nature of work is such that it is difficult to

measure e.g. cleaners, supervisors

 The work is not repetitive in nature

 The volume of production is not within the control

of workers

 The amount of output cannot be measured,

counted or standardised
 Under this system, wage are paid on the basis of
production

 The formula is as follows:

Earnings = number of unit produced * rate per unit
 If a worker is paid $15 per unit and he produces 20
units in 7 hours the total wages will be calculated as
20*$15 = $300
 The system encourages greater efficiency

 No payment is required for the idle time

 The fixed overheads are reduced with the increase

in output

 The work is completed more quickly and time

wasting is discouraged
 The quality of work may deteriorate

 The overwork on the part of workers is likely to

result in ill-health

 This may not be fair when the production is halted

because of shortage of materials, machinery
breakdown

 More rigid control may be needed and then increase

cost of supervision
 The amount of work can easily be determined and
measured

 The nature of work is repetitive

 The productivity is closely linked to the skill and

effort of the worker
 It is to pay to the workers a basic time rate plus a
portion of the wages equivalent of the time saved as
related to the agreed/allowed time for the work
 Time rate is guaranteed and the worker receives the
guaranteed wages irrespective of whether he
completes the work within the time allowed or
takes extra time for its completion.
 If the job is completed in less than the standard time
prescribed, worker is paid a bonus of 50% of the
time saved computed on the basis of the prescribed
time rate, in addition to the normal time wage.

Earnings = Time Wages + Bonus

= (hours worked * hourly rate)
+ 1/2 (time allowed –time taken)*hourly rate
 If a factory the normal hourly rate is $5. Time
allowed for job is 10 hour. Mr A takes 8 hours to
complete the job

 His total earnings will be calculated as:

Earnings = 8*5+1/2(10-8)*5=$45
 The bonus encourages the workers to save as much time as
possible because the higher the saving of time, the higher is
the bonus
 Morale may be improved if extra effort is reward
 Both the firm and the employer should benefit from the
introduction of an incentive scheme.
 Employees should receive an increase in wages arising from
the increased production.
 The firm should benefit from a reduction of fixed overhead
per unit
 Incentive schemes can be complex and difficult to
administer

 Establishing performance levels leads to frequent and

continuing disputes

 The quality of the output may decline

 Calculate total monthly remuneration of workers
A, B, C and D on the basis of the following
information for the month of January 2007:
1. Standard Production for each worker = 1,000 units
2. Rate of wages = 10 paise per unit
3. Bonus = Rs. 5 for each 1% increase over 90% of the
standard.
4. Dearness Allowance per month = 100% of piece
wage.
 The units completed by the four workers were as
under:
A = 950 units
B = 900 units
C = 960 units
D = 850 units
% of work done by the workers:
 A = 950/1,000 × 100 = 95%
 B = 900/1,000 × 100 = 90%
 C = 960/1,000 × 100 = 96%
 D = 850/1,000 × 100 = 85%
 In a factory bonus system, bonus hours are credited to the employee
in the production of time taken which time saved bears to time
allowed. Jobs carried forward from one week to another. No
overtime is worked and payment is made in full for all units worked
on, including those subsequently rejected.
 From the following, you are required to calculate for each employee:
 The bonus hours and amount of bonus earned;
 Total wage cost;
 The wage cost of each good unit produced.