LABOUR COST

Labour cost means wages paid to the

workers employed in any organisation
for producing goods or providing
services
Classification of Labour Cost
Direct Labour Cost
Indirect Labour Cost
 Control over Labour Cost
• Personnel Department
• Engineering and Work Study Department
• Time Keeping Department
• Payroll department
• Cost Accounting Department
 Personnel Department
Personnel department mainly concerned
with:
Recruitment
Selection
Personal records of each employees
Training
Promotions
Transfer and maintenance
 Engineering and Work Study Department
• Time Study : According to Benjamin, “Time study involves the techniques of
establishing an allowed time standard to perform a given task ,based upon
measurement of the work content of the prescribe methods, with due allowances
for fatigue and for personal and unavoidable delay”

• Motion study: : According to Benjamin, “Motion study is the study of body motion
used in performing an operations, with the thoughts of improving the operations,
by eliminating unnecessary motions and simplifying necessary motions and then
establishing the most favourable motion sequence for maximum efficiency

• Job Analysis: Job analysis involves a proper appraisal of all jobs in an organisation

• Job Evaluation:Job evaluation is a technique that measures the relatives worth of

a job in an oeganisaton
• Merit Rating: Merit rating is a technique used for ascertaining the workers fair
wages on the basis of their ability and performance
 Time –Keeping Department

This department is mainly concerned with recording of

attendance time of each worker engaged in the factory
Methods:
• Attendance or Time Register
• Token or Disc Methods
• Card Time Recorder/ Time clock Methods
• Biometric Time Recording clock
 Payroll Department

This department is responsible for the

payroll or the wage sheet and actual
payments to the workers
 Cost Accounting Deaprtment
This department is responsible for separately
recording the entries with regard to the wages
paid to direct and indirect labour
 Time Booking
It is the recording of time spent by each workers
on the various jobs carried out by him during his
period of attendance in the factory
Methods:
• Daily Time sheets
• Weekly time sheets
• Job cards/tickets
• Combined Time and job card
• Labour Cost card
• Piece Work card
 Labour Remuneration

Remuneration is defined as the rewards for

labour and services rendered
Methods:
• Piece –rate Methods
• Time –rate Methods
 Piece rate Methods
Under This methods , the employees are
rewarded based on their output.
Wages= Number of units produced*Rate per
unit
 Time rate methods
Under this methods, wages should be calculated
on the basis of the attendance of the workers

Wages = Rate per hour*No. of hours

OR
Rate per day*No. of days worked
 Incentives wages Plans
• Halsey Plan
• Rowan Plan
• Taylor’s differential piece-rate system
• Merrick’s Multiple Piece –rate System
• Emerson’s efficiency plan
• Gantt’s and bonus Plan
 Halsey Plan
Under this plan , the worker receives his guaranteed time
wages whether or not he completes the job or operation with
in standard hours fixed. However, he gets bonus equal to 50%
of wages for the timed saved in addition to his normal tome
wages.
Example: Normal hourly rate is 5 per hr. standard hours for
job is 10 hours and the time taken is 8 hours
Total Earning will be:
T*R+S-T/2*R
(8*5)+10-8/2*5= 45
T=Time Taken
R=Rate
S=Standard Time
 Rowan Plan
In this plan , a standard time is set up and actual
time recorded and if there is any time savings,
then bonus is given. Bonus is that portion of
wages of actual time taken, Which the time saved
bears to the standard time.
T*R+S-T/S*T*R
Example:
S.T for job= 10 hours
Actual time taken= 6 hours
Rate per hour= 75 paise
6*.75*4/10*6*.75= 6.30
 Taylor’s differential piece system
F.W taylor , the father of scientific management ,
introduced piece rates in terms of money a
lower piece rate for those failed to achieve the
standard, and a higher piece rate for those who
achieved or excelled the performance standards.
 Merrick Multiple piece rate
The defects in Taylor’s methods with regard to
sudden change in the rate of wages is removed
by this methods. Here total earnings depends
upon level of efficiency
Efficiency level Piece rate applicable
Up to 83% Normal rate
83-100% 110 % of Normal rate
Above 100% !20% of Normal rate
 Example:
Standard out put=200 units
Piece rate= 10 paise
Case 1 If out put =160 units
Efficiency= 160/200*100 =80%
Since the efficiency is less than 83%, the workers is paid only the basic rate,i.e, 10 paise so the
earning will be 8(80*.10)

Case 2 If output =180 units

Efficiency= 180/200*100= 90%
As the efficiency is more than 83% but less than 100%, 10% above the normal rate is paid to the
worker. So the earning will be 90*110/100*.10= 9.90

Case 3 If output =220 units

Efficiency= 220/200*100=110%
As the efficiency is 110%, 20% above the normal rate is paid to the worker.
Earnings will be = 110*120/100*.10= 13.30
 Emerson’s Efficiency Plan
• Day wages are guaranteed
• A standard time is set for each job or operations.
Alternatively, a volume of output is taken as std.
Efficiency level Piece rate applied
Up to 66.67 Guaranteed time rate
66.67% to 90% Time rate +10%as bonus
90% to 100% Time rate +20% as bonus
Above 100% Time rate+20%as bonus+
Additional bonus of 1% for every increase of 1% beyond
100% efficiency
 Gantt Task and Bonus Plan
• Workers who completes their task in the std.
time, get wages for the time taken plus bonus
at a fixed % of wages earned ( usually20%)
• Worker who completes their job in less than
std.time get wages for the std. time plus bonus
at 20%
• Slow workers are paid guaranteed wages for
the day
 Idle Time
Idle time refer to that of hours paid which are not
utilize for productive purpose. In other words, some
time is not used for production and the workers is
paid for these hours also.
Causes
• Productive Causes
• Administrative causes
• Economic causes
• Abnormal Causes
 Accounting Treatment of Idle Time
For The purpose of treatment in cost accounts idle
time can be segregated in to Normal idle time and
Abnormal idle time .
• Cost of normal and controllable idle time treated
as factory overheads
• Normal idle time may also be treated by inflating
the wages rate. It may be charged to direct wages.
• Cost s of abnormal and uncontrolled such as fire
machine breakdown. Such loss should be charged
to costing P&L account
 Overtime
Overtime occurs when a workers works beyond
normal working hours. Factory Act 1948 requires
that if a workers works for more than 9 hours a day
or 48 hours a week , then he has to paid at extra
the rate of normal hours.
 Accounting Treatment
Overtime consists of two parts:
• Normal wages
• Overtime premium
The normal amount of wages is charged as direct cost. The
overtime premium is treated as under:
• If overtime is paid to complete a job on the request of
customer it is charged to that job order
• If overtime cope within creased production, it is treated
as factory overheads
• If overtime worked to recover production loss due to
abnormal conditions such as strike , lock out ,flood etc.
the premium should be charge to costing P&L account
 Labour Turnover
It is the rate of displacement of the personnel
employed in an organisation due to resignation,
retirement or retrenchment etc. labour turnover is
thus change in workforce.
If the rate of turnover is more , this is a sign of
instability of labour and it affectsefficiency as well as
profitability of the firm.
Causes:
• Personal causes
• Avoidable causes
• Unavoidable causes
 Measurement of Labour Turnover
i) Separation rate methods: This methods takes
into account only those workers who have
left the organisation.
L.T.O= No. of separation in a peroid
_____________________________*100
Average No. of workers in the period
 ii) Replacement Methods
This methods takes into account only those new
workers who have joined in place of those left.
So it ignores workers engaged for expansion
programmes.

L.T.O= No of replacement in the period

___________________________ *100
Average No. of workers in the period
 iii) Flux rate methods
It shows total change in labour composition on
account of separation and replacement or
additions

L.T.O= No. of separation + No.of replacement

___________________________ *100
Average No. of workers in the period
iv) Equivalent Annual LabourTurnover Rate

This represents labour turnover in terms of days

or months

Equivalent rate of L.T.O=

L.T.O rate
_______________ *365
No. of days in relevant period
The following information relates to the personnel department of a factory
for the month of June 2019

No. of workers on June1,2019 1,000

No. workers on June 30,2019 1,500
No. of workers who left the company in june 10
No. of workers discharge in June 30
No. of workers recruited in June (including 120 on
account of expansion scheme) 140
Calculate the labour Turnover rate and Equivale
 Solution
i) Separation methods:
L.T.O Rate=
10+30
_____________*100 = 3.2%
1000+1500/2

Equivalent Annual L.T.O=

3.2
__________*365 =38.93%
30
 ii) Replacement Method

L.T.O Rate=
20
__________ *100 = 1.6%
1000+1500/2
Equivalent Annual Turnover rate=
1.6*365
__________=19.47%
30
 iii) Flux Methods
L.T.O rate=
40 + 20
_____________ *100 = 4.8%
1000+1500/2

Equivalent Annual Turnover=

4.8 * 365
_____________ =58.4%
30