Labor cost is another important element of cost in the total cost of production.

In fact for the n o n m a n u f a c t u r i n g b u s i n e s s , l a b o r c o n s t i t u t e s t h e h i g h e s t p r o p o r t i o n o f t h e t o t a l c o s t , especially in the service sector like banking, insurance, e t c . T h e basic aim of management is to keep monitoring the labor productivity against the total labor cost to achieve the object of low per unit labor cost. The higher the productivity, the lower will be the Labor cost per unit. In this sense, there has to be proper control over utilization of the work force and the salaries and wages bill for an organization. People w o r k a l l o v e r i n a n organization in various functions. In order to carry out these functions efficiently and effectively, t h e o r g a n i z a t i o n m u s t h a v e g o o d h u m a n resources policies and practices. In a manufacturing set-up where there is a larger proportion of workers and existence of trade u n i o n s , t h e r e h a s t o b e a c o r d i a l r e l a t i o n s h i p b e t w e e n m a n a g e m e n t a n d u n i o n t o e n s u r e motivated performance. In the service sector, Labor c o s t b e a r s t h e h i g h e s t p e r c e n t a g e t o t h e total. The purpose of cost accounting for Labor is two-fold viz. one to ascertain the cost and t w o t o p r o v i d e i n f o r m a t i o n t o the management for the purpose of taking decisions w i t h r e s p e c t to labor. The decisions are in the areas of: M a n p o w e r p l a n n i n g , R e c r u i t m e n t ,T r a i n i n g & d e v e l o p m e n t ,Salaries, wages and benefits,labor productivity & efficiency,r e t e n t i o n a n d l a b o r t u r n o v e r . In these days of growing economy and quality human resources, management becomes very crucial. F r o m t h e v i e w p o i n cost control, the areas where proper s r e q u i r e d c o u l d be listed as: dearth of o f labor cost t of labor ystems are

a) Employee attendance & time recording: In smaller organizations a manual register is m a i n t a i n e d , w h e r e each employee has to mark his attendance. In larger o r g a n i z a t i o n , electronic tools of recording attendance are used. An electronic card is swiped to record d a i l y entry and exit. Some organizations use the finger p r i n t s a v v y c a r d s a s w e l l . T h e good old days of time keeping office at the factory gate are no more in existence. b) Time booking to the cost centre and cost units: Time is recorded against the job or contract or a project so that the direct labor cost can be computed. In service industry also, time is recorded on specific activities. Direct and Indirect labor costs:

Direct labor cost is that portion of salaries and wages, which can be identified with a single cost unit. In other words when the time spent by the w o r k e r s c a n b e d i r e c t l y l i n k e d w i t h a c o s t unit, it will be costed as direct labor otherwise it will fall under the category of indirect labor c o s t . A w o r k e r w o r k i n g in the production department may not necessarily be directly identified with a cost unit. E.g. a foreman or a supervisor or a production-planning officer cannot be linked with a cost unit and therefore will be indirect labor. Hence just because a person works in production department does not mean he is a direct labor. Also, if a person working on jobs directly spends some time on repair of a machine, cost of that time should be taken as indirect labor cost. The distinction between direct and indirect l a b o r d e p e n d s ma i n l y o n w h e t h e r t h e l a b o r t i me is in sync with the cost unit or not. The direct labor cost is taken as a part of Prime Cost, w h e r e a s t h e i n d i r e c t c o s t is considered as an item of overhead. Indirect worker working with production department will constitute as Production overhead, whereas those working for administration, selling & distribution departments will be included in Administration, selling& distribution overheads.

ACCOUNTING I n t h e s e d a y s o f g r o w i n g e c o n o m y a n d dearth of quality human resources, management o f labour cost becomes very crucial.F r o m t h e v i e w point of labour cost control, the areas where proper s ys t e m s a r e r e q u i r e d c o u l d be listed as: a) Employee attendance & time recording : In smaller organisations a manual register isma i n t a i n e d , w h e r e e a c h e mp l o ye e h a s t o ma r k hi s a t t e n d a n c e . I n l a r g e r o r g a n i s a t i o n , electronic tools of recording attendance are used. An electronic card is swiped to recordd a i l y e n t r y a n d e x i t . S o m e organisations use the finger print savvy cards as w e l l . T h e good old days of time keeping office at the factory gate are no more in existence. b) Time booking to the cost centre and cost units : Time is recorded against the job orcontract or a project so that the direct labor cost can be computed. In service industryalso, time is recorded on specific activities. 10.1 Direct and Indirect Labour Cost

Direct labour cost is that portion of salaries and wages which can be identified with a singlecost unit. In other words when the time spent by the w o r k e r s c a n b e d i r e c t l y l i n k e d w i t h a c o s t unit, it will be costed as direct labour otherwise it will fall under the category of indirect labourc o s t . A w o r k e r w o r k i n g in the production department may not necessarily be directly identifiedwith a cost unit. E.g. a foreman or a supervisor or a production planning officer cannot belinked with a cost unit and therefore will be indirect labour. Hence just because a person worksin production department does not mean he is a direct labour. Also, if a person working on jobsdirectly spends some time on repair of a machine, cost of that time should be taken as indirectlabour cost.The distinction between direct and indirect labour depends mainly on whether the l a b o u r t i m e is in sync with the cost unit or not. The direct labour cost is taken as a part of Prime Cost,w h e r e a s t h e i n d i r e c t c o s t i s c o n s i d e r e d a s a n item of overhead. Indirect worker working withproduction department will constitute as Production overhead, whereas those working forAdministration, selling & distribution departments will be included in Administration, selling& distribution overheads. 10.2 Remuneration methods & Incentive schemes The employees working in any organisation are compensated by way of salaries, wages andother benefits. These payments are made in return of the s e r v i c e s r e n d e r e d b y t h e e mp l o ye e s . These services could be: Engaging in the process of transformation of raw material into finished product or Supporting the process of transformation by doing o t h e r f u n c t i o n s The salaries, wages and statutory benefits put together are called as remuneration. The incentivesa r e p a ym e n t s a n d b e n e f i t s g i v e n t o stimulate better performance or paid in return for a betterperformance. The incentives could be in monetary as well as non-monetary terms. While theremuneration is always individual based, incentives could be based on group performance.

Characteristics of a sound Remuneration system: ( a ) I t s h o u l d b e e a s y t o u n d e r s t a n d f o r e v e r y o n e a n d e a s y t o i m p l e m e n t . ( b ) I t s h o u l d p r o v i d e f o r a r e w a r d f o r g o o d w o r k a n d p e n a l t y f o r b a d w o r k m a n s h i p ( c) It should help keeping labor turnover within stable limits (d) It should be able to attract talent and retain them (e) It should minimize absenteeism (f) It should reflect a fair return to employees in consistence with efforts put in by them (g ) I t s h o u l d b o o s t p r o d u c t i v i t y a n d p e r f o r m a n c e ( h) It should be flexible enough to factor in effects of changes in cost of living, and systems o f s i m i l a r c o m p a n i e s i n t h e s a m e industry.The payments could be broadly classified into Those paid on the basis of time spent by an employee irrespective of output produced by him, called Time Rate. Those paid on the basis of output given by the employee irrespective of the time spent by him, calledPieceRate Based on these two basic payment methods, many variants thereof have been developed over t h e l a s t c o u p l e o f c e n t u r i e s . M a n y o f t h e s e s y s t e m s w e r e d e v e l o p e d k e e p i n g i n v i e w t h e manufacturing industry, where measurement of physical performance is relatively easier. In modern times, especially for indirect workers, many of these plans will not work. Indirect workers and staff & managers are usually paid on time basis only

ACCOUNTING B 97 Separation Method : The numbe manpo shown LT is considered as relationship between total r of separationsduring the period& average wer during the period. Mathematically, it is as:

LT Ratio = x 100I f t h e m a n p o w e r a t t h e b e g i n n i n g o f t h e y e a r

2006 was 2500 and at the end of 2005 was 2600, theaverage workforce is (2500+2600)/ 2 i.e. 2550. If 250 p e o p l e h a v e l e f t t h e c o m p a n y d u r i n g t h e ye ar, the LT ratio is (250 / 2550) x 100 i.e. 9.80% Accession method : Under this method, the total accession i.e. additions is considered in thenumerator. The logic is that LT affects costs and efforts for replacing the left employees. Inabove example, we had 2500 people in the beginning and 2600 at t h e e n d a f t e r 2 5 0 p e o p l e l e f t . The accession will be 350 (2600+2502500). The LT ratio here will be (350/ 2550) i.e. 13.73% Replacement Method: This method recognises only replacement made in t h e n u me r a t o r . T h e logic is that if there is no replacement theres no additional cost. The formula here i s : LT Ratio = x 100 Avoidable Separation method : b c c b According to some experts, the separations caused y reasonslike retirement or death of employees annot be included in the LT ratio. We should onsiderseparations due to reasons that could have e e n a v o i d e d o n l y . T h e f o r m u l a h e r e i s : LT Ratio = x 100

Flux Method: It takes into account the total displacement i.e. separations as well as accessions.So the numerator considers average of separations & accessions. The formula is: Control over Labour Turnover The first task for controlling the labour turnover is to diagnose the causes for the same. Oncethe causes are diagnosed, the efforts can be made to minimize t h e r e a s o n s o f p e o p l e l e a v i n g t h e organisation. The process of recruitment, selection, training, placement, promotions could beproperly systematized to make employees remain with the organisation. Many big organisationstake help of consultants and experts in this area. Effective reporting of reason-wise separationss e r v e s a great deal in forming policies to mitigate the l a b o u r t u r n o v e r . T h e c a u s e s c o u l d b e classified as avoidable and non-avoidable. Avoidable causes:

- D i s s a t i s f a c t i o n w i t h w o r k i n g c o n d i t i o n s A m A v e r a g e m a n p o w e r a n p o w e r i n t h e p v e r a g e m a n p = o w x e r

r e m u n e r a t i o n i n t h e e r i o d i n t h e p p

I m p r o p e r v e r a g e

e r i o d A e r i o d

L T

R a t i o

1 0 0 e r i n t h e p e r i o d ( N o o f a c c e s s i o n s ) o o f

A v e r a g e m a n p o w s e p a r a t i o n s + N 12 x

ACCOUNTING B 98 Labour Cost and Direct Expenses - D i s s a t i s f i e d w i t h j o b c o n t e n t - U n h a p p y p e r s o n a l p o l i c i e s o n i n c r e m e n t s a n d p r o m o t i o n s - Lack of proper facilities Unavoidable causes: - D e a t h , R e t i r e m e n t o r i l l h e a l t h - Domestic reasons like marriage of female workers- S e a s o n a l w i t h

n a t u r e o f b u s i n e s s B e t t e r p r o s p e c t s Costs of Labour Turnover

S h o r t a g e o f r e s o u r c e s p h y s i c a l r e a s o n s

It is difficult to measure the labour turnover costs correctly as it is difficult to link costs to theseparation of people. These costs are basically: a) Preventive costs: Costs associated with personnel administration, welfare facilities,employee developmental programmes, retirement policies, attractive remuneration b) Replacement costs: Costs associated with recruitment, training and induction of newpeople, loss of production during the transition period, cost of defective production,and cost of additional supervision on new workers.These costs are generally treated as overheads as they cannot be directly linked with cost units. 10.10 Measuring labour efficiency and productivity Employees help the process of converting raw material into finished product. Even in the daysof extensive automation, role of manpower cannot be underestimated. Organsiations todaytake every possible step to attract and retain good manpower. The remuneration methods,fringe benefits, working conditions etc. go a long way in ensuring that employees remain en-gaged with the organisation. One more factor is important in the process of rewarding goodemployees for their performance is measurement of the performance.Performance measurement involves the following steps:1) Defining the work properly this is done though setting up the job evaluation, work study, time & motion study and other engineering methods. It is a l s o n e c e s s a r y t o d e - fine the complexity of the job, discipline required, degree of supervision needed.2) Defining the skills needed to perform a job After defining a job, the qualities and skillsn e e d e d t o p e r f o r m the same are listed. It also includes education, t r a i n i n g , p h y s i c a l qualities, responsibility, etc.3 ) Setting up job profile people are recruited c o n s i d e r i n g t h e r e q u i r e me n t s d e f i n e d u n - der the above two steps. People should be given a clear cut idea

of their job profile. If j o b p r o f i l e o r d e s c r i p t i o n i s not properly defined, the employees wont be able to per-form.

ACCOUNTING B 994 ) M e a s u r e m e n t o f w o r k d o n e t h e w o r k d o n e b y employees must be correctly measured.The measurement must be done in comparison with the t a r g e t s s e t i n t h e f o r m o f K e y Result Areas (KRAs) for a period.5 ) M e r i t r a t i n g o n l y m e a s u r i n g w o r k i s not enough to judge an employee performance.His personal qualities and development should also be tracked. Merit rating is a sys-tematic evaluation of an employees appraisal. It is usually done by the

superior. Itassesses employee performance, interpersonal re ability to lead etc. There may be assigned to each of thesef a c t o r s is given. 10.11 Direct Expenses

on the basis of work l a t i o n s , c o o p e r a - tion, different weightages and an overall rating

In the study note 8, we studied the element-wise classification costs as material, labour andexpenses. We have also seen that all these elements could be further reclassified as direct andi n d i r e c t . T h e d i r e c t m a t e r i a l plus labour plus other expenses together become p r i me c o s t . S u m total of all indirect costs viz. indirect material, indirect labour and indirect expenses is called aso v e r h e a d s . In chapter 8, we discussed the material (direct & indirect) cost in detail. In the above sections,w e discussed the labour (direct & indirect) in detail. We now will discuss the expenses. The expenses represent that part of the cost which is other than material and labour. It is basically cost of facilities or services which are used as aids to production. The expenses again could be classified as direct and indirect. In this section we will talk aboutDirect Expenses.Direct expenses are those expenses (other than material & labour) which can be directly associ-a t e d w i t h a job or a process or a cost unit. They are a part of prime cost. They are also referredto as Chargeable expenses. They do not physically form part of the f i n a l p r o d u c t l i k e ma t e r i a l cost, but facilitate the output directly.Examples of direct expenses are:R o y a l t i e s a n d p a t e n t f e e s p a i d f o r u s i n g t e c h n o l o g y - Hire charges for special machines, facilities, tools etc that are used in relation to a s p e - cific job or process- S u b - c o n t r a c t o r s c h a r g e s f o r getting some operations done by outsourcingConsultancy charges paid exclusively for a jobC o s t o f s p e c i a l d e s i g n , l a y o u t - A r c h i t e c t s f e e s - Traveling for a specific job

ACCOUNTING B100 Labour Cost and Direct Expenses The proportion of direct expenses in the total cost is usually small. In a factory, expenses thatc a n b e d i r e c t l y linked to production departments also can be clubbed as direct expenses. Ex-amples are power & electricity charges paid based on the meter reading in the productiondepartments. These are absorbed i n t o t h e p r i m e c o s t . In service industry, the direct expenses are related to the generation of service. For example, at r a n s p o r t i n g c o m p a n y p r o v i d e s transportation service. The expenses on the vehicle mainte-nance, petrol & fuel etc can be directly linked to a vehicle and can thus be treated as directexpense. For an educational institute, the charges paid for educational consultants in develop-ing the curriculum may be taken as direct e x p e n s e f o r t h a t p a r t i c u l a r c o u r s e . Certain expenses may be direct expenses for certain costs centers but they are indirect for thep r o d u c t i o n d e p a r t me n t s . T h e s e d o not form part of prime cost, but absorbed as overheads.

Collection of direct expenses Direct expenses are collected based on the vouchers indicating the specific job or process num-b e r s f o r which they are incurred or paid. There could be agreements for payment of royalties.Provisions for direct expenses may be made based on specific p u r c h a s e o r d e r s i s s u e d f o r h i r - ing, consulting etc. Treatment of direct expenses The direct expenses are debited to the W. I. P. account of the specific job or process. In case of contracts or projects, they are debited to the specific contract or project as the case may be. Inservice industry, it is charged to the cost of generating service.