Module III- (Labour and Overheads)

Direct labour
Direct labour refers to the labour which can be identified with a
particular product or job. It is the workforce directly engaged in the
manufacturing activities.
Indirect labour
Indirect labour refers to the labour which cannot be identified with a
particular job or product. It is the workforce not directly engaged in
the manufacturing activities.
Labour cost
Labour cost refers to the total expenditure incurred by employers for
the employment of employees.
Labour cost control
Labour cost control means control over the cost incurred on labour.
It is a system which ensures proper employment of labour and its
effective utilization.
Fringe Benefits
Fringe benefits are non-wage benefits that are provided by
employers to their employees in addition to their regular wages or
salary. These benefits may include various types of insurance,
retirement plans, paid time off, and other perks such as discounts or
flexible work arrangements.
Importance/ Objectives/ Advantages of labour cost control
 It minimize labour cost per unit of production.
 It control ideal time, overtime, labour turnover etc.
 It increases the labour productivity.
 It helps in absorption of overhead.
 It improves profitability and prosperity of firm.
 It facilitate effective utilization of skilled labours.
Techniques of labour cost control
 Assessment of manpower requirement
 Time and motion study
 Job evaluation and merit rating
 Labour productivity
 Wages system/ Incentive system
 Control over time keeping and time booking
 Control over labour turnover
 Control over casual/ contract and other workers.
Time keeping
The process of recording the time arrival and departure of workers is
known as time keeping.
Objectives/ Purpose of time keeping
 To facilitate preparation of pay roll.
 To meet statutory requirements.
 To maintain discipline in attendance.
 To calculate overtime.
 To control labour cost.
 To introduce incentive plan of wage payment.
Methods of time keeping
 Manual methods
 Attendance register method
 Disc or token method
 Mechanical methods
 Time recording clocks
 Dial time recorder
 Key recorder
 Biometric time attendance system
Time Booking
It is the recording of time spend by the workers on different jobs or
work.
Objectives/ Purpose of time booking
 To ensure the time spend by a worker in a factory.
 To ascertain labour cost of each individual job.
 To ascertain unproductive time or ideal time.
 To know the efficiency of workers.
 To prevent waste of labour time.
Methods of time booking
 Daily time sheet
 Weekly time sheet
 Job card
Difference between time keeping and time booking
Time keeping Time booking
It record attendance time of It is a record work time of
workers. workers.
It is a statutory obligation. It is not statutory required.
It is the first step in time It is the second step in time
recording. recording.
It is Maintained by the time It is maintained by departmental
keeper. supervisors.
It is for the purpose of wage It ensure wage paid are properly
calculation. ensured.
The purpose is to enable The purpose is to ascertain
preparation of pay roll. labour costs of job.
Merit rating
It is a labour cost control technique. It aims at evaluating the workers
actually performing the jobs.
Wages abstract
It is a document showing distribution of wages by job, department
etc. It is also called wage analysis sheet. It is prepared by costing
department.
Incentives
It is an additional pay, a higher wage or a bonus paid to promote the
productivity of an employee.
Payroll (Wage sheet)
It is a sheet containing the details of wage payable to the workers.
It is a consolidated statement of wage payable to each workers.
Must roll method
Attendance register or must roll method record the time of arrival
and departure by a time recording staff or by putting signature by
the workers themselves.
System/ Methods of wage payment
1. Time wage system or time rate system
2. Piece wage system or piece rate system
3. Incentive wage system
Time wage system or time rate system
Under this method of wage payment, the workers is paid at an
hourly, daily, weekly or monthly rate.
Advantages of time rate system
 It is simple to understand.
 It is easy to operate.
 It guarantees minimum wages to workers.
 Quality of output become superior.
 It is acceptable to the workers and trade union.
 It ensure careful handling of tools and equipments.
Disadvantages of Time rate system
 Workers are not motivated.
 Strict supervision negatively affect.
 It encourages go slow of work.
 It does not provide incentive to work hard.
 Ideal time is considerably increased.
 Workers become lazy.
 Workers try to avoid work.
Piece rate wage system
Under this system of wage payment, a fixed rate is paid for each unit
produced, job completed or an operation performed.
Advantages of piece rate wage system
 Workers are paid according to their merits.
 Workers are motivated to increase production.
 Profit per unit increases.
 Idle time is minimized.
 The employer can make quotations confidently.
 Less case of defective tools and machinery.
 Less supervision is required.
 Inefficient workers are motivated to become efficient.
Disadvantages of piece rate system
 This system opposed by trade union.
 Minimum wage are not guaranteed.
Halsey Premium Plan
Under this method, the worker is given wages for the actual time
taken and a bonus equal to half of wages for time saved.
Advantages of Halsey Premium Plan
 It is simple to calculate.
 It guarantees time wages to workers.
 Helpful in reducing labour cost per unit.
 It motivates efficient workers.
 Helps to reduce production cost.
Disadvantages of Halsey Premium Plan
 Quality of work suffers.
 Workers criticize this method on the ground that the employer
gets a share of wages of the time saved.
Rowan Plan
Under this method bonus is that proportion of the wages of the time
taken which the time saved bears to the standard time allowed.
Advantages of Rowan Plan
 It guarantees time wages to workers
 The quality of work does not suffer
 Labour cost per unit is reduced.
 Fixed overhead cost is reduced.
Disadvantages of Rowan Plan
 Workers do not get the full benefit of the time saved by them.
 Very efficient and not so efficient workers may get the same
bonus.
Ideal time
There is a difference between the time booked to different jobs or
work orders and time recorded at the factory gate. This difference is
known as ideal time.
Normal ideal time
Normal ideal time refers to the ideal time which is normal and which
cannot be avoided.
Abnormal ideal time
Abnormal ideal time refers to ideal time due to abnormal reasons.
It can be avoided.
Over time
It is the work done beyond the normal working period in a day or
week.
Time and motion study
It is a technique for recording the time of performing a specific job
which is carried out under specific conditions.
Labour hour rate
It refers to the use of people for carrying out a task.
Machine hours rate (MHR)
It simply means cost of running a machine per hour. It is the hourly
cost in terms of factory overheads to operate a particular machine.
Advantages of machine hour rate
 It is a scientific, logical and accurate method.
 It gives importance to the time factor.
 It is useful for estimation of cost of a job.
 It helps to knowing idle time of machines.
 It helps to compare operating cost of each machine.
Dual hour rate
This is the combination of machine hour rate and direct labour hour
rate.
Tenders or Quotation
It is an offer made by a person to supply certain goods at a specified
price.
Overhead cost (On cost)
On cost means overhead cost. It is the indirect cost incurred in the
factory, office and selling and distribution department.
Primary distribution of overhead
It means the allocation and apportionment of overhead to both
production and services department directly or an agreed ratio or
proportion.
Classification of overhead
 Function wise classification
 Manufacturing overhead
It is the total cost involved in operating all production facilities of a
manufacturing business. It is also called factory overhead or work
overhead.
 Administrative overhead
It is the general business expenses not related to production,
marketing or research costs.
 Selling and distribution overhead
The expenses incurred by an organisation in carrying out its selling
activities.
 Behavioural wise classification
 Fixed overhead
It is a set of cost that do not vary as a result of changes in activity.
 Variable overhead
It is a cost of operating a firm that fluctuate with the level of business
or manufacturing activity.
 Semi variable overhead
It is a cost composed of a mixture of both fixed and variable
components.
Apportionment of overheads
The process of charging proportionate amount of overheads to
various departments on suitable basis is called apportionment of
overheads.
Allocation of overheads
It is the process of charging full amount of the overhead cost to a
particular department or cost centre.
Difference between cost allocation and cost apportionment
Cost allocation Cost apportionment
It deals with allotment of whole It deals with allotment of
item to the cost. proportionate items of cost.
It is a direct process. It is an indirect process.
It is a simple process. It is a complicated process.
It is accurate. It is only approximate.
 There is no need to choose base. It is done on some suitable base.
Absorption of overhead
It means charging of overheads of a particular cost centre to its
different cost units by means of overhead absorption rates.
Methods of absorption of overhead
 Production unit method
 Percentage on direct material cost method
 Percentage on direct labour cost method
 Percentage of prime cost method
 Direct labour hour rate method
 Machine hour rate method
 Dual hour rate method
Difference between apportionment and absorption of overheads
Apportionment Absorption
It is the allotment of proportion It is the allotment of overheads
of cost to the cost centres. to cost units.
It starts before absorption. It starts after apportionment.
Suitable or equitable bases are Percentage rate of overheads
used. are used.

JUBAIR MAJEED
RAHUL MURALI

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