COST ACCOUNTING (PART-5)

LABOR COST CONTROL - 1

1. INTRODUCTION
Dear students, welcome to the lecture series on cost accounting, today in
this lecture we shall cover the topic labor cost control. We shall learn

 Meaning of labor
 Significance of labor
 Handling of labor and
 Total labor cost.

The objective of this lecture is to control over the increased labor cost
due to inefficiency of workers, ideal time, unnecessary over time so that
the labor cost can be minimized and output can be enhanced and its
quality can be maintained with the proper utilization of the labor force.

2. MEANING AND TYPES OF LABOR AND LABOR COST

We shall learn the meaning of labor and the labor cost.

The person who transforms a raw material into the finish product in a
production process is known as labor

For example

1. A weaver in a weaving industry

2. A tailor in the readymade industry.

1|Page
 What he is doing?

He is transforming the raw cloth into the garment, so they are known as
labors.

What is labor cost?

Labor costs are all such expenditures which are being paid to the person
who is putting his skills into the raw material so that it can be
transformed into a new identifiable unit.

Such payments are:-

 Basic wages
 Dearness allowance
 Production bonus
It can be other benefits also like
 Employers contribution to PF
 Employer’s contribution to ESI
 Retirement benefit plans
 Old age pension plans
There are non pecuniary benefits like
 Medical facilities
 Hospital facilities

So they all shall form the part of labor cost.

2|Page
These labor cost can be of two types.

Either it can be direct labor cost or indirect labor cost.

What is direct labor cost?
A direct labor cost means those costs which can be directly identifiable
into the product, process or operation and that helps in transforming the
raw material into finish products.

3|Page
For example- Basic wages paid to the weaver in a weaving unit. What are
its peculiar features:-
Firstly those skills, such efforts can be traceable directly onto the
product,

For example –
A carpenter is putting his time, his skills to manufacture a chair, so we
can directly identify his skills applied for transforming the wood into the
chair, so this is known as direct labor cost.

The treatment of direct labor cost-

Direct labor cost is a part of direct cost and it shall become part of prime
cost. Direct labor cost is variable cost as it varies with the volume of
output.
Suppose our carpenter is manufacturing 10 chairs, so the direct labor cost
will be per chair, for one chair if we are paying him Rs.100 per hour and
he is taking 8 hours to manufacturing one chair, so Rs.800 for one chair
and for 10 chairs, this direct labor cost will amount to Rs.8000.

Direct Labor cost for per hour Rs 100 per chair

Carpenter is taking 8 hours to manufacture 1 chair

Cost per chair= Rs.100 * 8= Rs.800

For 10 chairs= Rs.800 * 10 = Rs.8, 000

This way we shall compute the direct labor cost.

Now students, we shall learn what is indirect labor cost?

Indirect labor cost are those cost which cannot be directly identified into
a product, process or operation, they are ancillary or helping cost for

4|Page
 transforming the raw material into the finished products in a production
process.

Examples are other departments which are providing services in the

production processes.

For example
 labor employed in payroll department,
 labor employed in work study and motion study department,
 labors employed in cost accounting department,
 labors employed in marketing department,

Any payment made to such labor shall form the part of indirect labor
cost, so together, direct labor cost and indirect labor cost shall form the
total labor cost.

3. SIGNIFICANCE OF LABOR COST

Now students, we will learn the significance of labor cost, the labor cost
is important in the total cost because if inefficient labor is being hired
into the production processes, it will shoot up the total cost of the
product, process or operation.

For example if a work is required to be completed in 10 hours, if

inefficient labor is employed or under qualified labor is employed, he will
complete up the work in 20 hours, if the wages are paid on hourly bases,
the total wage amount will go double the normal amount so it will
increase the total cost of the product.

Resultantly its implication will fall on the quality and the labor force. So
we need to control the labor cost for improving the productivity and for
minimizing the labor cost per unit because once labor is paid overly or
over payment of labor is made, our production cost will shoot up and

5|Page
when we average this cost over all the units produced, per unit cost of
the product will be more than the required standards.

It will hamper our sales and revenue. So it is the prime factor which
needs to be control while carrying out the production process.

Now students we will learn the significance of labor cost

Why is labor cost important?

It is important because if the labor cost is in control, the total cost shall
be controlled that means that labor cost forms the part of total cost so
we need to ensure that the labors are paid adequately for the amount of
work they are putting into the production processes and they should not
be over paid on account of ideal time or on account of unnecessary over
time.

So our objective is to control this labor cost so that the productivity of

the labors can be enhanced and maximum production can be meet by
utilizing this labor force.

So the significance of labor cost is that we need to control it in order to

bring down the total cost per unit.

What happens that once labors are paid, the labor cost shall form the
part of total cost?

Now when we average this total cost over all the units produced, the
total cost per unit will rise on account of over payment of labors due to
their inefficiency or due to the ideal time which we need to avoid at all
the cost, that’s the significance of labor cost. So what happens that;

It is not the high wage which is important; it is the low labor cost per unit
which needs to be taken into account while controlling the labor cost.

Labor is important for transforming the raw material into finish goods so
adequate study should be done for their time devotion to a particular job
or process and the motions which they put for completing up a project,
so unnecessary motions and unnecessary devotion of time to a particular

6|Page
 job can be avoided, with this we have learn how significant it is to put
control over the labor cost so that per unit labor cost comes minimum.

4. MANAGEMENT OF LABOR
We shall learn how the labor is handled in an organization that is how
the labor is managed, what the requirements of labor in an organization
are and how the organization is going to meet the expectation of labor in
the organization. We know that labor is very complex and delicate part of
the organization, so we need to handle them in a very sophisticated
manner, proper remuneration is utmost important but other factors
should also be kept in mind so that our labor can be a satisfactory force
and their needs can be fulfilled. So these factors are as follow:

1. Selection of the labor- The labor should be selected as per the

requirement of the job. He should have adequate skills and qualification
to take up that particular job.

7|Page
 For example in a finance department, the role of accountant should be
given to the person who is having the skills and knowledge of commerce
and can work on accounting software and he should also have interest in
that job.
2. Proper training- The labor should be given proper training to accomplish
his task and duties.
For example if in the finance department only, we are hiring the
accountant he should know when to prepare MIS reports, how to prepare
them, how to make the balance sheets, how to collect data, the step by
step training should be given to him so that he can go up well on the job.

3. The working condition– Working Conditions should be proper that means

proper ventilation, proper temperature and proper cleanliness should be
maintained. There are certain norms fixed by the BPO industries in the
present scenario where they required keeping the lighting and the
temperature on fixed parameters, this way the organization should follow
all these working condition requirements in a proper way.

4. Incentive- The labor should be given a good incentive for their work, if
they are working above the expectation of the management, they should
be rewarded for their work, like we can give them a bonus or a incentive,
it could be based on the piece basis or time basis, which we will learn
later on and negative reward can also be given by which we can curtail
the further work or specialized work to them and they can be provided
only routine activities. These are the essentials which have to be fulfilled
for keeping the labor force happy and satisfactory.

5. CONTROLLING THE LABOR COST

Now students, we will learn how to exercise control over the labor cost.

Labor cost needs to be control at all the stages of production that is from
the point of the induction into the organization till they become part of
the production process and transforms the material into a finish good.

8|Page
 We need to control the cost incurred on them so that their productivity
can be enhanced and our total cost per unit of the products so
manufactured comes down, for that there should be concentrated efforts
of so many departments involved in the organization.

So we need to coordinate with all the departments so that labor cost can
be minimized and control at each stage that is at the time they were
appointed, till they have started transforming the raw material.

Now let’s learn what are the departments involved in the labor cost
control procedure.

1. The Personnel department,

2. Engineering and work study department
3. Time keeping department,
4. Payroll department and
5. Cost accounting department.

These are the departments which are accountable for controlling the
labor cost, now how they are controlling the labor cost, we will learn
their functions one by one.

First comes the Personnel department

It is also known as human resource department, so there role starts from

the recruitment of the labor force, they are responsible for selecting the
right personal for the right job.

Then they have to provide training, so training cost should be incurred in

such a way that finally the labor becomes productive for the
organization, induction cost needs to be bear by this department, so
recruitment, selection, training, development, induction of the labor.

9|Page
 They are responsible for these functions.

and they are required to keep the records of the person so hired.

Next comes the engineering and work study department

It’s the most important department in an organization because it

performs the critical functions of time study and motion study.

It is the prime responsibility of this department to work out

 job descriptions,
 job specifications and
 job evaluations

Which are necessary to hire the proper labor force?

10 | P a g e
 Now let’s learn its functions in detail,

1. Preparation of plan and specification of each job- It means that what

are the requirements of a job.

For example there are production units running in an organization, if

production unit A requires the engineer requiring digging or drilling of the
oil, so all the parameters which are required for drilling the oil should be
properly specified and this technical work is being done by engineering
and work study department.

2. Supervision of production activities within the production department-

A close supervision of the production activities are to be done that is
unnecessary wastage of time, unnecessary motions that is movement of
labors from one point to another whether they are required or not, these
sorts of supervisions are required to be turned by the engineering
department.

3. Maintaining safety and official working condition- it means that the

engineering and work study department has to ensure whether proper
safety measures are being taken care of.
For example- Fire extinguishers are being placed in an organization,
emergency doors are there in the case of disaster, proper disaster
recovery plans are being implemented, education is being provided to the
employees for using the emergency doors etc.

4. To conduct time and motion study- time study is necessary so that they
can record the time required to complete a task in a given job by the
employees of normal and reasonable skills. Motion study means studying
the moments of the employees or labor force from one job to another or
from one point to another in the production process. We can minimize
these motions so that time can be saved on each job and resultantly the
cost can be minimized, for example if we place the departments nearby,
the store department and the production department can be placed in

11 | P a g e
 such a way that whatever requisite or material is needed for the
production, it can be collected with minimum moments from one point in
a unit to another.

5. Conducting job analysis- all the requisite parameters related to a job are
to be analyzed, they have to be specified and coming as the byproducts
of job analysis are job evaluations, job specifications and merit rating
which this department has to finish up.

With all this studies, the department is required to set the piece rate,
piece rate means the amount of wages paid for producing a particular
unit,

1 unit = Rs. 10

That’s called the piece rate which is determined after taking into account
all these techniques such as time and motion studies, job evaluations, job
specification.

With this we have learn the role of engineering and work study
department.

Next department is the time keeping department

Time Keeping Department is one which is helpful in controlling the labor

cost; it performs the following functions,

1. Recording of the arrival time and departure time of each worker, it uses
certain techniques as
 Stop clock or tickets or disc etc.

2. Recording time spend on each job by the workers, certain techniques can
be use to record such times.

12 | P a g e
 The next department is payroll department,
Payroll department looks after the maintenance of records of the
employees; they work out the pay slips of the employees and disburse the
wages and salary to the labor.

Next one is and it’s the last department which is required to exercise
control over the labor cost, it is known as cost accounting department. It
classifies the data given, then it collects all the data related to labor
from all the respective departments that is from personal department,
payroll department where its charge the labor cost to the concern
department, for example production A, production B, production C, there
are three production units running in an organization, so cost accounting
department will transfer the cost related to particular unit by a
appropriate and equitable bases to that particular department.

Next is it allocates the cost to the concern department, it also apportion

the common labor cost on a equitable bases and finally the cost
accounting department analyses the labor cost reports such as ideal time
report, over time report, reliance from budgeted labor cost so that they
can take the corrective actions and reduce the labor cost which is being
spend on ideal time or on over time, with this we have learn the roles of
various departments for controlling the labor cost.

6. JOB ANALYSIS, JOB DESCRIPTION AND JOB EVALUATION

Now students we will learn another important aspect for controlling the
labor cost and it initiates from the time the requirement of a job is
generated in an organization, this is known as job analysis, this work is
being carried out by engineering and work study department.

Now what is job analysis?

Job analysis is the gathering of information and data in relation to a job,

under job analysis, the task responsibilities and duties are associated with
a job are analyzed,

13 | P a g e
 What’s the purpose of doing the job analysis?

The purpose is, it helps in

 recruitment process,
 placement process,
 selection,
 training and development of the employees,
 it helps in job evaluation,
 it helps in job specification,
 it also helps in conducting the merit rating of the employees,

How it shall help because it’s the primary work which an organization has
to perform for hiring the employee.

There are three outcomes of job analysis which are categorized in three
parts,
 first one is job description,
 second one is job specification and
 third one is job evaluation

What is job description?

Job description means it’s a written description of the roles and
responsibility of each element of the task to be performed by a employee
in his particular job, for example a finance manager is recruited so the
job description for his job will be what he has to do and how he has to do
that means what sort of listening he has to maintain with other
departments, how he has to conduct his work, what are the time limits in
which he has to conduct the work, this is known as job description where
each and every duty related to the job is being mentioned, it’s something
like offer letter given to the new hirer, what’s the utility of job
description, the utility of job description is it describe the job to the
potential candidate, it is a guideline to the hired employee and for
specifically he has to do and it provides a point of comparison in upraising
whether actual duties assign are being done, the job description is very

14 | P a g e
helpful at the time of appraisal because it forms the base for the
evaluation of the work done by the employee.

Now next comes the job specification,

Job specification specifies minimum acceptable qualifications required by

the individual to perform a task in a efficient manner,

for example in case of a hospital if the specialist are appointed so the

minimum qualifications are being given in the job specification, for
examples MD’s required, so it will be specifically be mentioned in the job
specification, what sort of qualities he needs to posses, in case of small
organization, the jobs are so divided and also specified so as a proper
person is recruited on a proper post, where there is a requirement of
under graduate, under graduate is appointed, if its requirement of post
graduate person, that will be appointed in a particular job, so job
specification is the basic document which will be required so that proper
allocation of the labor force can be done across the organization.
Next concept is job evaluation,

Job evaluation means it provides the relative value of each job in an

organization, relative value means we have comparing the jobs in a
particular organization, that means how fruitful it is to hire a person on a
particular job whether it is generating revenue or it’s a cost center,
whether there is requirement of that job into the organization or not.

15 | P a g e