Labour Cost

Labour cost

Human efforts used for conversion of materials

into finished products or doing various jobs in the

business are known as labour. Payment made

towards the labour is called labour cost. It can also

be direct and indirect.

Direct Labour: Direct labour is all labour expended and

directly involved in altering the condition, composition

or construction of the product. The wages paid to

skilled and unskilled workers for manual work or

mechanical work for operating machinery, which can

be specifically allocated to a particular unit of

production, is known as direct wages or direct labour

cost. Hence, 'direct wage' may be defined as the

measure of direct labour in terms of money. It is

specifically and conveniently traceable to the specific

products Wages paid to the goldsmith for making gold

ornament is an example of direct labour.

Example of direct labour

• Machine operator

• Shoe-maker

• Carpenter

• Weaver

• tailor

INDIRECT LABOUR

• Indirect Labour: Labour employed to perform work incidental to production of goods or those engaged for office work, selling and distribution activities are known as 'indirect labour'. The wages paid to such workers are known as 'indirect wages' or indirect labour cost.

• Example: Salary paid to the driver of the delivery van used for distribution of the product.

Example of indirect labour

• Supervisor

• Inspector

• Cleaner

• Clerk

• Peon

• watchman

Organisation for accounting and control of labour

costThere are mainly five departments in an organisation

which deal with labour .

These are as follows:

Personnel department

Engineering department

Time-keeping department

Payroll department

cost accounting department

Labour Turnover

In all business organisation , it is a common

feature that some workers leave the

employment and new workers join in place of

those leaving .this change in work force is

known as labour turnover . Labour turnover

is this thus defined as ‘the rate of change in

the composition of the labour force in an

organisation.’ Labour turnover varies greatly

between different trades and industries .for

eg, where part-time and seasonal labour is

employed ,the rate will be higher.

Measurement of labour Turnover

To facilitate comparisons between different

periods and different undertakings , labour

turnover may be expressed in rate .

There are three alternative methods by

which this rate is computed .once a particular

method is used ,it should be consistently

followed for comparative analysis.

The methods are:

1-separation method:

Measurement of L T 2-Replacement method

3- Flux method

Separation method:This method takes in to

account only those workers who have left

during a particular period .its formula is:

LABOUR TURNOVER RATE= NO.OF WORKERS LEFT DURING A PERIOD X100

AVERAGE NO. OF WORKERS DURING THE PERIOD

SEPRATION METHOD

AVERAGE NO. OF WORKERS=

NO.OF WORKERS IN THE BEGINNING. + NO.OF WORKER AT THE END

2 MULTIPLICATION BY 100 IN THE ABOVE FORMULA

INDICATES RATE IN PERCENTAGE.

REPLACEMENT METHOD

This method takes into account only those new

workers who have joined in place of those who

have left. Its formula is:

Labour turn over =

No. of workers replaced during the period

x100

Average no. of workers during the period

If new workers are engaged for expansion program or any

other such purpose, they are not considered for this

computation.

FLUX METHOD

This shows the total change in the

composition of labour force due to

separations and additions of workers .its

formula is:

Labour turnover rate =No. of workers left + no. of workers replaced x 100

Average no. of workers

PRACTICAL PROBLEM

From the following data given by the personnel

department. calculate the labour turn over rate

by applying:

(a) Separation method

(b) Replacement method, and

(c) Flux method

No. of workers on the payroll:

At the beginning of the month 900

At the end of the month 1100

Practical

During the month 10 workers left, 40 persons were

discharged and 150 workers were recruited .Of

these , 25 workers are recruited in the vacancies of

those leaving while the rest were engaged for an

expansion scheme.

Casual worker

The casual or ‘badli’ workers are temporary

workers who are not in the regular payroll of the

factory .they are appointed on daily basis to

meet additional work load or to stand in for

absentee workers.

The appointment of casual workers is a very

common source of fraud in the payment of

wages .it is, therefore, very important to have

control over there appointments, their time of

work and their payment of wages.

Steps should be taken for

accounting and control of casual

workers A)Full control regarding appointment and

discharge of such workers should be maintain.

B) The appointment of such workers should be

sanctioned by a competent executive.

C)Payment of wages should be made by a

person other than one who appointed them .

D)When they are appointed as indirect

Workers ,Time sheets should be issued to

them.

STEPS

E) when casual worker are employed at

site for some contract work ,surprise

visits should be paid to check their

number.

OUT- WORKERS

These are the workers who work out side the factory premises on behalf of the under taking known as out- workers. out-workers are classified in to two categories as given below:

A)Worker who work from their homes: they are supplied with raw materials and thy work either with their own tools or tools supplied by the concern .such worker are usually paid on piece basis .

CONTROL OVER SUCH WORKER

SHOULD BE EXERCISD IN THE

FOLLOWING MANNER

1)All materials supplied should be accounted

for and there should be no undue wear and

tear of tools supplied by the concern.

2) The work should be delivered within the

stipulated time.

3)The quality of finished work should be

carefully inspected.

(B)Workers sent to

site

Some workers may be sent to site or customers

premises for performing work. For example-

some companies supplying engineering

products provide after sales service and

workers sent to customers place when so

required. such out workers may while away

their time when they go out for work .job cards

should be issued to them so that labour cost of

work done can be ascertained.

Idle Time

Idle time represents time lost by workers who are paid on time basis .when workers are paid on time basis , some difference between the time for which they are paid and that they actually spend on production is bound to arise. this difference is known as idle time. idle time represents the time for which they are paid but no production is obtained . For example : time lost between factory gate and department, time when production is interrupted by machine maintenance ,tea breaks etc.

Causes idle time may occur owing to

productive, administrative or economic causes

1-Productive causes: The productive causes are those

which result in loss of production. These include:

(a)idle time due to machine break down.

(b)power failures.

(c)waiting for tools and /or raw materials.

(d) waiting for work

(e)waiting for instructions

Idle time due to productive causes is usually controllable

by proper planning, strict supervision and proper

maintenance of plant and machinery.

2-Administrative causes

Idle time is sometimes caused by administrative

decisions .This usually happens during

depressions when some of machines have got

to work below normal capacity and regular

workers paid full amount of wages . This is

because the management does not want to

discharge trained workers temporarily. Such

abnormal idle time arises out of abnormal

situation and is generally not controllable.

3-Economic causes

Idle time may also be caused by fall in the demand

of products , say due to sever competition

,seasonal nature of certain industries like woolen

goods, ice-cream ,etc. where production can not

be evenly distributed throughout the year. In such

cases it is not possible to get rid of workers during

slack season. Such surplus labour force is utilised

for doing some other jobs and if such

complementary jobs can not be found ,there will be

some idle time which is beyond control.

Treatment of idle time

From the point of view of treatment in cost accounts ,idle time may be classified as normal and abnormal .

Normal idle time :This is that waste of time which we can not stop because it is normal and employer has to pay laborers for this idle time. For example :

a) Walking time from one department to other department.

b) Consuming time to start any job in factory.

c) Consuming time for fulfilling personal needs like drinking of water, refreshment and rest.

d) Consuming time to set the machines.

Treatment of the Cost of

Normal Idle Time

1)-As overhead-It must be charged as indirect

expenses in factory. For example, if a laborer

gets Rs. 1 per hr and he spend 8 hrs in

factory and his total wage will be Rs. 8 but he

utilized his productive time 7 hrs, then direct

labor cost will be 8 hrs X Rs. 1 = Rs. 8 and 1hr

will be overhead of idle time and Rs. 1 per hr

idle time will be written in factory expenses in

cost sheet.

2)-As direct wages We can also increase the cost of labor rate.

with following way

If a labor works for 8 hrs, he gets = Rs. 1 per hr

If a labor works for 7 hrs, he gets = Rs. 1 / 8 X 7

= Rs. 1.14 per hr

Now labor cost will increase by 0.14 paise

Abnormal Idle Time

This is that wastage of time which we can stop by good supervision.

a) waste of time due to inefficiency of engineers.

b) Power failure

c) Delay of supply of material to factory

d) Strike and lockout

Treatment of the cost of Abnormal

Idle Time

Wage for abnormal idle time is loss of

business and it must be transferred to

costing profit and loss account.

Over time

Over time occurs when a worker works beyond

the normal working hours. The normal working

hours are laid down in the factories act.

Acordingly,any worker working for more than 9

hours per day or more or more than 48 hours

per week is entitled to over time payment..The

factories act also provides for payment of

overtime wages at double the normal rates of

wages .the overtime work therefore, a costly

affair and should be avoided as far as possible

.

Leave with pay

According to the factories act , workers are

entitled to annual leave with full pay for a

specified number of days in a year. This may

include casual leave , medical leave ,special

leave etc. The cost of paid leave can not be

charged to any work order or cost unit since no

work is done during this period .it is there fore

,treated as indirect labour cost and charged to

over head.

Leave with pay Alternatively, leave wages may be treated as

direct labour cost in which case the wage

rate is inflated. This is done by estimating in

advance the amount of leave wages and

spreading it over the actual no. of working

hours to give an inflated hourly rate.

Holiday with pay

Workers are also entitled to certain holidays

like diwali,id, Republic day, independence

day etc. Like leave wages, payment of

these wages of holiday is also unproductive

in the sense that no production work is

done on these days. Payment for such

holidays should there fore be treated in the

same way as leave wages.

Worker's Remuneration:

The remuneration for labour is wages. The workers put effort & get wages in exchange of that. On the basis of pay scale & other allowances which are prescribed in the terms of employment, calculation of wages paid to direct or indirect workers is done. By terms of agreement between the employees & the employer, this may be modified from time to time. On the basis of job evaluation, merit rating, incentive plans, profit sharing & labour contract, the wages for the workers are determined.

Features essential for a successful wage plan:

A successful wage plan should have the under mentioned essential features:

Fairness:

A wage plan which is based on scientific time & motion study becomes fair to both

employer & employee.

Minimum Wage guarantee:

Minimum wage guarantee must be given to the workers, whether under legal

compulsion or not. This minimum wage must be fairly above subsistence level of

income.

Link between effort & remuneration:

Unless there is a link between the value of work done & the remuneration payable,

there will be unfair to either the employer or the worker.

Satisfaction for the workers:

The worker must be satisfied by the wage plan which will result in high morale & low

labour turnover.

Work guarantee:

If there is payment by result, worker's earnings will not be satisfactory,

even if the rate is too high, unless continuous work is there, which is

available to them.

Conformity with legal provisions & trade agreements:

The wage plan should always be in accordance with any of the provisions

of law relating to the payment of wage & also there should not be any

violation of trade agreement.

Flexibility: The wage plan must be flexible & not rigid. In case of change

in situations, incorporation of some change may have to be there in the

wage plan also. Unlike rigid plan, modification can be made in the flexible

plan without much disturbance.

Cost of implementation: The wage plan cost of implementation must

be as low as possible

LABOUR COST

Methods of Remuneration (systems of wage payment)

There are two basic methods of labour remuneration:

(a) Time Rate System; and (b) Piece Rate System

Time Rate System

Under the time rate system, workers are paid according to the time for

which they work. Payment may be on hourly basis, daily basis or monthly

basis. In this system, no consideration is given to the quantity or quality of

work done. When payment is made on hourly basis, total wages payable

are calculated as follows:

Wages = No. of hours worked x Rate per hour

Piece Rate System

Wages under this system are paid according to the quantity of work done.

A rate is fixed per unit of production and wages are calculated by the

following formula:

Wages = Rate per unit x No. of units produced.

Various Incentive Plans

Straight Piece Rate Method

The method rewards employees based on their output. A fixed rate of wage

is paid for each unit produced, or number of operations completed or job

completed. The wages payable is calculated by multiplying the number of

pieces produced by the wage rate. There is generally a guaranteed hourly

rate for workers who are unable to attain the standard in order to pay the

minimum ‘day wages’.

Flat Time Rate Method

This method is used for paying remuneration to employees based on their

attendance. A fixed rate of wage is paid hourly, or daily, or weekly on the

basis of time spent on the shop floor (i.e. production department) in

production. The wages payable is calculated by multiplying the hours/days

spent in production by the hourly/daily wage rate.

•Halsey Premium Bonus Plan (Halsey Plan and Halsey-Weir Plan)\

This plan was introduced by F A Halsey in 1891. It is a simple combination

of time and piece rate systems. A worker is paid a guaranteed base rate

and is rewarded when his performance exceeds standard. A standard time

is established in respect of each job or unit. Bonus is paid on the basis of

50% of time saved. The total wages payable is calculated as under:

= (Hourly rate X Time taken) + (50% X Time saved X Hourly rate)

As a result of increased productivity, conversion cost per unit falls. This is

because fixed overhead gets distributed over larger volume of output.

Thus, the firm finds it possible to reward workers directly in proportion to

production.

In the case of Halsey Weir plan, the percentage used is 30 instead of

50.

Rowan Premium Bonus Plan (Variable Sharing

plan)

A standard time is established in respect of each job

or process. There is a guaranteed base rate. A

bonus is paid on the basis of time saved computed

as a proportion of the time taken which the time

saved bears to the standard time. The total wages

payable is calculated as under:

= (hourly rate x time taken) + ( time saved x time taken) x hourly rate

time allowed

Taylor Differential Piece Rate Method

This system was introduced by F. W. Taylor, the father of Scientific

Management. The main features of this incentive plan are as follows:

1)Day wages are not guaranteed, i.e. it does not assure any minimum

amount of wages to workers.

2)A standard time for each job is set very carefully after time and

motion studies.

3)Two piece rates are set for each job- the lower rate and the higher

rate.

The lower piece rate is payable where a worker takes a longer time

than the standard time to complete the work.

Higher rate is payable when a worker completes the work within the

standard time.

In other words, lower piece rate is payable to inefficient workers and

higher piece rate is payable to efficient workers. It will be seen that

there is a great difference between the wages of an efficient and an

inefficient worker.

Problem 1

You are presented with the following information by Olympia

Engineering Company related to the first week of December

1999.

The firm employs 5 workers at an early rate of 2. During the

week, they worked for 4 days for a total period of 40 hours

each and completed a job for which the standard time was

48 hours for each worker. Calculate the labour cost under the

Halsey method and Rowan method of incentive plan

payments.

Solution of Problem # 1

Hasley Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate)

= (10 x 40) + (0.5 x 8 x 10)

= 440

Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate

Time Allowed

= (10 x 40) + (8 x 40) x 10

48

= 467

Problem 2

A worker is allowed 10 hours to complete a job on daily

wages. He takes 6 hours to complete the job under a scheme

of payment by results. His day rate is Rs. 6 per hour and piece

rate is Rs. 36. The material cost of the product is Rs.40 and

the overheads are charged at 150% of the total direct wages.

Calculate the factory cost of the product under

i) Piece work plan

ii) Rowan Plan

iii) Halsey plan

Solution of Problem # 2

Price Rate System = Rate per Unit x No. of Units produced

= 6 x 6

= 36

Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate

Time Allowed

= (6 x 6) + (4 x 6) x 6

10

= 50.40

Hasley Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate)

= (6 x 6) + (0.5 x 4 x 6)

= 48

Problem 3

From the following particulars calculate wages earned by

workers A and B respectively under Taylors System:

Standard time allowed 10 units per hour

Normal wage rate Rs. 1 per hour

Differential rates to be applied:

90% of piece rate when below standard efficiency

125% of piece rate when at or above standard production

on a day of 8 hours

A – 75 units

B -85 units

Solution of Problem # 3

Unit rate= 1/10 =0.1 Rs/ unit

Below efficiency Rate = 0.10 = 0.10*0.9 = 0.09 Rs/unit.

Above efficiency Rate = 0.10 = 0.10*1.25 = 0.125 Rs/unit.

Worker A:-

Produced unit = 75

Therefore, wage= 75*0.090 = 6.75Rs (ANS)

Worker B:-

Produced Unit = 85

Therefore, wage= 85*0.125 = 10.625 ~ 10.63Rs (ANS)

References/Sources

Accounting for Managers by Dr. Sakshi Vasudeva Galgotia

Publishing Company Chapter 23 Labour Cost Accounting page no.

787

Cost Accounting by S.P jain K.L Naran Part 2 Chapter 5 Labour

cost – Computation and control page no. 5.1

THANK YOU