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
cost
There 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

=6x6
= 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)

THANK YOU