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Chapter-4

ACCOUNTING OF LABOUR AND COST

CONTROL

Meaning and Concept of Labour Cost

Direct and Indirect Labour Cost

Control of Labour Cost

Organisation for Control of Labour Cost

Idel Time

Labour Turnover

Factors Affecting Cost of Labour

Method of Remuneration

Analysis of Accounting for Labour and Cost Control

· Direct Labour Cost to Prime Cost Ratio

· Direct Labour Cost to Factory Cost Ratio

· Direct Labour Cost to Cost of Production Ratio

· Direct Labour Cost to Cost of Sales Ratio

MEANING AND CONCEPT OF LABOUR COST

Labour cost is the second important element of cost of production.

Wages, salaries and other forms of remunerations represent a major

portion of the total cost of a product or services. The growth and

profitability of the concern depends upon proper utilization of human

resources or labour force which in turn needs proper accounting and

control of cost. Thus, control of labour cost is a very significant issue

from the view point of management.

Labour constitutes an important element of the total cost of

production. Human contribution is represented by labour. From the

sensitivity point of view of the various cost elements, the most sensitive

element is the labour cost, because human behavior is related to it.

Therefore, approach required to control labour cost is completely

different from the approach required for the control of other cost

elements. For the control of labour cost, the study of labour behavior,

performance measurement, results analysis, time and motion study,

control on the attendance and departure, in all matters human approach

are essential.1

Labour is such an element, the storing of which for the future is not

possible, therefore it is similar to most perishable material. Keeping

material idle will not result in loss unless such material is of perishable

nature; but on the hand, keeping labour idle will result in loss as for such

idle time also remuneration has to be paid. Labour has established itself

147

1. Shilliglaw Gordon, “Cost Accounting: Analysis and Control”, Richard D. Irwin Inc.

Homewood, Illinois, 1976, p.127.

as a very important part of the organization, in modern labour

management and, hence no problem with labour, except with human

approach, can be successfully solved. If management takes any measure

which affects the social, financial or political interest of the labour, that

may result in strike disruption in work and drainage of money. As a

result, a term agreement is entered by the present day management with

the labour unions and the obligations mentioned therein are faithfully

obeyed.

Labour cost control means labour cost control per unit. Unit cost

can be reduced by obtaining more output against the same rate of

remuneration. Thus labour cost reduction means for the same wage

obtaining more output or for the higher wage obtaining more output but

does not at all means wage-cut.

Industrial undertakings used to engage the following different type

of labours2:

a. Regular labour

b. Hired labour

c. Casual labour

d. Out workers

‘Regular labour’ are those labours who have been recruited on the

permanent requirements basis, ‘hired labour’ are those who have been

hired through labour agents or contractors, casual labours are those

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2. Batty J., “Management Accountancy”, MacDonald and Evans Ltd, London, 1970, p.71.

labours who have been engaged on temporary basis as and when

required and ‘out workers’ are those who have been recruited as regular

or casual labour but has been sent to sites or customers’ premises.

Workers of all categories are classified into skilled labour and

unskilled labour, besides the above classification.

DIRECT AND INDIRECT LABOUR COST

The labour cost can be classified into two types:

(1) Direct Labour Cost,

(2) Indirect Labour Cost.

(1) Direct Labour Cost

Any labour cost that is specially incurred for or can be readily

charged to or identified with a specific job, contract, work order or any

other unit of cost is termed as direct labour cost.

Wages for supervision, wages for foremen, wages for labours who

are actually engaged in operation or process are the examples of direct

labour cost.

Idle time, overtime, and fringe benefits associated with direct labor

workers pose particular problems in accounting for labor costs. Are

these costs a part of the costs of direct labor or are they something else?

Idle Time

Overtime

Fringe Benefits

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Idle Time : Machine beak downs, materials shortages, power

failure, and the like result in idle time. The labor costs incurred during

idle time are ordinarily treated as manufacturing overhead cost rather

than as a direct labor cost. Most managers feel that such costs should be

spread over all the production of a period rather than just the jobs that

happen to be in process when breakdown or other disruptions occur.

Overtime Premium: The overtime premium paid to all factory

workers (direct labor as well as indirect labor) is usually considered to

be a part of manufacturing overhead and is not assigned to any particular

order. At first glance this may seem strange, since overtime is always

spent working on some particular order. The reason is that it would be

considered unfair and arbitrary to charge an overtime premium against a

particular order simply because the order happened to fall on the tail end

of the daily production schedule.

Labour Fringe Benefits : Labour fringe benefits are made up of

employment-related costs paid by the employer and include the cost of

insurance programs, retirement plans, various supplemental

unemployment benefits, and hospitalization plans. The employer also

pays employer’s share of Social Security, Medicare, workers’

commission, federal employment tax, and state unemployment

insurance.

(2) Indirect Labour Cost

Indirect labour is for work in general. The importance of the

distinction lies in the fact that whereas direct labour can be identified

with and charged to the job, indirect labour cannot be so charged and

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has, therefore to be treated as part of the factory overheads to be

included in the cost of production. For example, salaries and wages of

supervisors, storekeepers, maintenance labour, etc.3

CONTROL OF LABOUR COST

Control of labour cost is a significant influence on the growth,

profitability and cost of production.

Labour cost may become unduly high due to inefficiency of labour,

ineffective supervision, ideal time, unusual overtime work etc. The

primary objectives of the management therefore, are to efficiently utilize

the labour as economically as possible.

In order to achieve the effective utilization of manpower resources,

the management has to apply proper system of labour cost control. The

labour cost control may be determined on the basis of establishment of

standard of efficiency and comparison of actual with standards. The

management applies various techniques for the effective control of

labour costs as under:

(1) Scientific method of production planning.

(2) Use of labour budgets.

(3) Establishment of labour standards.

(4) Proper system of labour performance report.

(5) Effective system of job evaluation and job analysis.

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3. Shah Parvin, “Cost Control and Information System”, p.197.

(6) Devise a proper system of control over idle time and unusual

overtime work.

(7) Establish a fair and equitable remuneration system.

(8) Effective cost accounting system.4

ORGANISATION FOR CONTROL OF LABOUR COST

The objectives of proper control on labour cost is effectively

achieved through the functions of various departments responsible for

controlling labour cost in an organisation.

The following are the important departments for control over

labour costs:

(1) Personnel Department

(2) Engineering and Works Study Department

(3) Time Keeping Department

(4) Pay Roll Department

(5) Cost Accounting Department.

(1) Personnel Department

Personnel department plays a very important role in control of

labour costs. It is primarily concerned with the recruitment of labours on

the basis of employee placement requisition and imparting training to

them and thereafter placing them to the job for which they are best

suited. In order to achieve the efficient utilization of manpower

resources, this department is responsible to execution of labour policies

which have been laid down by top management.

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4. Baggott Joseph, “Cost and Management Accounting”, 1973, p.219.

(2) Engineering and Works Study Department

Engineering department is primarily concerned with maintaining

control over working conditions and production methods for each job,

process, operation or departments.

It is performed by undertaking the following functions :

(1) Preparation of plan and specification of each job.

(2) Maintaining required safety and efficient working conditions.

(3) Making time and motion studies.

(4) Conducting job analysis, job evaluation and merit rating.

(5) Setting fair and equitable piece rate or time wage system.

(6) Conducting research and experimental work.

In order to maintain control over working conditions and

production methods carrying a detailed study of the following operations

is necessary:

(a) Method Study

(b) Motion Study

(c) Time Study

(d) Job Analysis

(e) Job Evaluation

(f) Merit Rating.

(a) Method Study: It is one of the important components of work

study. The main aims of this study is to find a scheme of least wastage.

Method Study is defined as “a systematic and scientific evaluation of

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existing and proposed plans and performance of any work system and

the evaluation of improvement, through analytical process of critical

examination.”

(b) Motion Study: Frank Gilbreth, who is the real founder of

Motion Study. According to him motion study may be defined as the

“science of eliminating wastefulness resulting from ill-directed and

inefficient motions.”

The following are the important objectives of the motion study:

(1) Effective ut1isation of material, machine and labours.

(2) Elimination of wastage of time and labours.

(3) Maintaining higher standards of safety and health.

(4) Reducing unnecessary movements in order to minimize

wastages.

(5) Better design of work place layout for effective production

process.

(6) Ensure fair remuneration with job satisfaction.

(c) Time Study: Time study is also called work measurement. Time

study may be defined as “the art of observing and recording the time

required to do each detailed element of an industrial operation.”

Uses of Time Study are following:

(1) It assists in setting standard time for each operation.

(2) It facilitates effective labour cost control.

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(3) It helps to ascertain ideal time and over time to men and

machines.

(4) It is useful to establish fair and suitable wage rates and

incentives.

(5) It facilitates effective utilization of resources.

(d) Job Analysis: Job Analysis is a formal and detailed study of

jobs. Job analysis may be defined as the process of determining by

observation and study the task, which comprise the job, the methods and

equipment used and the skills and attitudes required for successful

performance of the job.

The following are the important advantages of job analysis :

(1) It is useful in classifying job and interrelationship among

them.

(2) If facilitates forecasting of manpower requirements.

(3) It helps in effective utilization of manpower resources.

(4) Effective employee development programme can be

established.

(5) Enables in determining performance standards of each

process or job.

(e) Job Evaluation: Job evaluation may be defined as “a process of

analyzing and describing positions, grouping them and determining their

relative value by comparing the duties of different positions in terms of

their different responsibilities and other requirements.” Job evaluation is

determined on the basis of job description and job analysis. The primary

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purpose of job evaluation is to develop appropriate wage and salary

structure with internal pay equity between jobs.

(f) Merit Rating: Merit rating may be defined as “a systematic

evaluation of an employee’s performance on the job in terms of the

requirement of the job.” Merit rating is a system of measuring both

qualitatively and quantitatively of an employee’s capacity in relation to

his job.5

(3) Time Keeping Department

This department is concerned with following two important

activities:

(1) Timekeeping and

(2) Time Booking.

Timekeeping: It refers to recording of each worker’s time of

coming in and going out of the factory during engagement of the factory.

It is essential for the purpose of attendance and determination of wage

payable to each worker.

Objectives of Timekeeping: The following are the important

objectives of timekeeping:

(1) Preparation of payrolls

(2) Ensuring discipline in attendance

(3) Apportionment of overhead on the basis of labour hours

(4) Effective utilization of human resources

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5. Oswal, Maheshwari, Modi and Gupta, “Advanced Cost Accounting and Cost Control”, R.B.D.

Publications, Jaipur, 2014, p.3.19.

(5) Minimization of labour costs

(6) Ascertaining ideal labour time and ideal machine time.

Methods of Timekeeping: The following are the two important

methods of timekeeping:

(1) Manual Method:

(a) Attendance Register Method

(b) Token or Disc Method.

(2) Mechanical Method:

(a) Time Recording clocks

(b) Dial Time Records

(c) Key Recorder System.

Manual Method: The choice of the manual method adopted by the

factory depends upon its size, number of workers employed, nature of

the business and policy of a firm. Under manual methods, there are two

important methods which are in use: (a) Attendance Register Method

and (b) Token or Disc Method.6

(a) Attendance Register Method: Under this method, an

attendance register is maintained by the Timekeeper in the

time office. This register may be filled in by the Timekeeper

when the worker gets inside the factory and the time of

departure.

This method is very simple and most suitable to small-scale

industries. It is very difficult to operate when the number of

workers is large.

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6. www.kweblogics.com/2012/06/significance-of-cost-accounting.html

(b) Token or Metal Disc Method: In this method, each worker is

given a metal disc or a token bearing his identification

number. All the tokens or discs are hung on a board serially at

the entrance of the gate in the factory. As the worker enters

the gates of the factory, he removes his disc from the board

and drops it into a box.

This process is continued until the scheduled time expires.

Latecomers may drop their tokens in a separate box or

handover personally to the timekeeper. In the case of

absentees the tokens are not removed from the board. Based

on the above process, the timekeeper records the attendance

in the register known as Muster Roll for the purpose of pay

rolls.

This method is simple and economical. But it suffers from

certain disadvantages given below:

(a) There is chance to remove the disc of fellow worker’s

token from the board to ensure his presence.

(b) Difficult to ascertain about overtime work, early leaving,

ideal time etc.

(c) Lack of accuracy regarding the exact time of arrival of a

worker which may result in many disputes.

(d) Unless there is strict supervision, the timekeeper may

include dummy or ghost workers in the Muster Rolls.

Mechanical Method: In order to achieve the accuracy and reliability

of recording of time of workers, the following different mechanical

devices are used :

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(a) Time Recording Clocks

(b) Dial Time Records

(c) Key Recorder System.

(a) Time Recording Clocks: Under this system, each worker is

given a time card for a week or fortnight. These time or clock cards are

serially arranged in a tray at the entrance to the factory. When the worker

enters the factory, he takes his allotted card from the tray and puts it in

the time recording clock that records the exact arrival time at the space

provided on the card against the particular day.

This process is repeated for recording time of departure for lunch,

return from lunch, leaving the factory after his day’s work. Late arrivals,

early leavings and overtime are printed in red so as to distinguish these

from normal period spent in the factory. This method is very popular for

correct recording of attendance.

(b) Dial Time Records: This is a machine which is used for

recording correct attendance time of arrival and departure of worker

automatically. This recorder has a number of holes about the

circumference. Each hole represents worker’s number which

corresponds to identification of allotted clock numbers. At the time of

arrival and departure of worker, by operating this machine, the dial arm

into a hole and the time is automatically recorded on an attendance sheet

placed inside. This machine is most suitable in small scale industries.

(c) Key Recorder System: In this machine there are a number of

keys, each key denotes worker’s number. When the time of arrival and

departure the worker inserts his allotted key in the key hole and gives a

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turn, the ticket time and clock time are recorded on a sheet of paper. This

method is economical and easy to operate.

Time Booking : It refers recording the time of each worker for each

department, operation, process or job during engagement of the factory.

It is useful for the purpose of cost analysis and effective cost control.

Objectives of Time Booking: The following are the main objectives

of time booking:

(1) To ascertain the cost of each job, operation or process.

(2) To ascertain the cost of ideal time.

(3) Apportionment of overhead based on the suitable basis.

(4) To establish the fair and suitable wage system.

(5) To ensure the proper utilization of attendance time.

(6) To ensure the effective cost control and cost reduction.

Methods of Time Booking: In order to achieve the effective

utilization of manpower resources, recording the correct time of workers

and labour cost control is essential to adopt various methods of time

booking.

The following are the important methods used for time booking :

(1) Daily Time Sheet

(2) Weekly Time Sheet

(3) Job Cards or Job Tickets:

(a) Job Card For Each Worker

(b) Job Card For Each Job

(c) Combined Time and Job Card

(d) Piece Work Card

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(1) Daily Time Sheet: This is one of the important methods which

is used for a daily record of the work done by each worker. This record

indicates that the nature of work, actual time spent by the worker on

each job or operation. The daily time sheet is allotted to each worker on

which the record is made by the worker himself or by the official

in-charge. This method is suitable only for small-scale industries.

(2) Weekly Time Sheet: This system may be done as in the case of

daily time sheet. Under this method, instead of recording time on daily

time sheets, worker is given a weekly time sheet on which recording by

the worker on each job for a week. This method is useful for those

concerns where the workers usually carryon a few jobs in a week.

(3) Job Card or Job Tickets: This method is adopted for recording

of time booking for a worker’s time spent on a job. A job card is

prepared for each job giving detailed particulars of the work to be

carried out by the worker. Job cards are classified into four types7:

(a) Job Card for Each Worker: Under this system, job card is

issued to each worker at the beginning of each day or week.

The job card is used to record the time of starting and

finishing the each job or work. It indicates the nature of work,

time spent by the worker for each job or operation, idle time,

total hours, rates and remuneration of different jobs during a

scheduled time.

(b) Job Card for Each Job: In this system, separate card is

prepared and allotted to each job. The job card is used to each

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7. Oswal, Maheshwari and Jain, “Cost Accounting”, R.B.D. Publications, Jaipur, 2012, p.3.5.

job passes along with the job from worker to worker. As soon

as the worker receives the job card he records the time of

starting and finishing the job or operation. This system is

useful not only for correct calculation of wages for each job

but also it shows the details of the work to be done by the

worker.

(c) Combined Time and Job Card: Under this system, job card is

prepared on the basis of attendance time and actual time spent

by the worker. This system is useful to ascertain idle time,

time taken and time booking on account of pay rolls.

(d) Piece Work Card: This system is adopted where the piece

wage payment is applicable.8

Idle Time

Wage payment is made on the basis of quantity of output produced

by the worker. A piece work card is allotted to each worker on which

recording the quantity of work to be done by each worker is given. For

determination of piece wage payment, the time spent by the worker is

not taken into account. This method is suitable only for small scale

industries.

Idle Time is that time during which the workers spend their time

without giving any production or benefit to the employer and concern.

The idle time may arise due to non-availability of raw materials,

shortage of power, machine breakdown etc.

Types of Idle Time: It refers to any loss of time which is inherent in

every situation which cannot be avoided. Any cost associated with the

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8. Phophalia A.K., “Cost Accounting”, RBSA Publishers, Jaipur, 2004, p.92.

normal idle time are mostly fixed in nature. The normal idle time arises

due to the following reasons :

(1) Time taken for personal affairs.

(2) Time taken for lunch and tea break.

(3) Time taken for obtaining work.

(4) Time taken for changing from one job to another.

(5) Waiting time for getting instructions, tools and or raw

materials, spare parts etc.

(6) Time taken by the workers to walk between factory gate and

place of work.

Abnormal Idle Time

Abnormal idle time refers to any loss of time which may occur due

to some abnormal reasons.

Abnormal idle time can be prevented through effective planning

and control. The abnormal idle time may arise due to the following

avoidable reasons :

(1) Faulty planning.

(2) Lack of co-operation and co-ordination.

(3) Power failure.

(4) Time lost due to delayed instructions.

(5) Time lost due to inefficiency of workers.

(6) Time lost due to non-availability of raw materials, spare parts,

tools etc.

(7) Time lost due to strikes, lock outs and lay-off.

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Accounting Treatment of Normal Idle Time and Abnormal Ideal

Time

Normal Idle Time: Normal idle time wages is treated as a part of

cost of production. Thus, in case of direct workers an allowance for

normal idle time is built into labour cost rates. In the case of indirect

workers, normal idle time wage is spread over ,all the products or jobs

through the process of absorption of factory overheads.

Abnormal Idle Time: Abnormal idle time cost is not included as a

part of production cost and is shown as a separate item in the Costing

Profit and Loss Account so that normal cost is not distributed.

Over Time: The term “over time” refers to when a worker works

beyond the normal working hours or scheduled time is known as

‘overtime.’ According to Factories Act, the wage rate of overtime work

is to be paid at double the normal rate of wages. The extra amount of

remuneration is paid to the worker in addition to normal rate of wages is

said to be overtime premium.

Effect of Over Time Payment on Productivity: The following are

the effects of over time payment on productivity:

(1) Overtime premium is an extra payment over normal wages

and hence will increase the production cost.

(2) The efficiency of workers during overtime work may fall and

hence output may be reduced.

(3) To earn more, workers may not concentrate on work during

normal hours, and thus the output during normal hours may

fall.

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(4) Reduced output and increased premium will increase the cost

of production.

Accounting Treatment of Overtime Wages: The following are the

ways of charging of overtime premium:

(1) If overtime is resorted to at the desire of the customer then

overtime premium is charged to concerned job directly.

(2) If overtime is required to cope with general production

schedule or for meeting urgent orders, the overtime premium

should be treated as overhead cost of particular department or

cost center which works overtime.

(3) If overtime is worked on account of abnormal conditions such

as flood, earthquake etc. that should be charged to costing

profit and loss account.

Control of Overtime: Control of overtime is essential to minimize

the cost of production and increase the overall performance of the

efficiency. Effective control of overtime can be possible through the

following ways :

(1) Effective sound planning of production

(2) Adequate supervision

(3) Ensuring availability of raw materials, spare parts

(4) Encouraging productivity

(5) Reducing labour turnover

(6) Ensuring effective system of repairs and maintenance,

material handling and smooth flow of production

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(7) Fair and equitable remuneration to efficient and inefficient

workers.

(4) Pay Roll Department

This is one of the important departments, which is responsible for

computation, preparation, and payment of wages to all employees of the

entire organization. Wage Sheet or Pay Roll is prepared on the basis of

the Piece Work Card or Time Card or both. It is a statement which shows

the detailed records of the employees’ remunerations such as gross

wages, various reductions and net wages for particular period.

In order to ensure the proper determination and preparation of wage

sheet, the pay roll department should be taken a special care. A

systematic procedure for payment of wages should be adopted to

preventing of frauds and irregularities in wage payments. Effective

supervision and strict control are essential to ensure that the worker is

not paid twice or no dummy name of workmen have been entered in the

pay roll.

Labour Turnover

Labour Turnover may be defined as “the rate of changes in labour

force, i.e., the percentage of changes in the labour force of an

organization during a specific period. Higher rate of labour turnover

indicates that labour is not stable and there are frequent changes in the

labour force in the organization.

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It will affect the efficiency of the workers and overall profitability

of the firm. The determinant result of labour turnover is expressed in

terms of percentage.

Methods of Measurement of Labour Turnover : The following are

the important methods of measuring labour turnover: (a) Separation

Method (b) Replacement Method (c) Flux Method.

(a) Separation Method : Under this method, labour turnover is

calculated by dividing the total number of separation (number of

employees left or discharged) during the period by the average number

of workers on the pay roll.

Thus, the formula is :

Labour Turnover = No of Separation during the Period

Average No of Workers d

.

. uring the Period´ 100

(b) Replacement Method : In this method, labour turnover is

measured by dividing the number of replacement of workers during the

period by average number of workers during the period.

Thus formula may be expressed as :

Labour Turnover = No of Workers Replaced during the period

Average No of Wor

.

. kers during the period´ 100

(c) Flux Method : Under this method, labour turnover is measured

by dividing the total number of separation and replacement of workers

by the average number of workers during the period. Thus the formula is

:

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Labour Turnover = No of Separation No of Replacement

Average No of Worker

. .

.

+

s during the period´ 100

Causes for Labour Turnover: The causes for labour turnover can be

classified into two categories (a) Avoidable Causes, (b) Unavoidable

Causes.

(a) Avoidable Causes:

(1) Lack of job involvement

(2) Lack of co-operation among the employees

(3) Lack of smooth relationship between employer and

employees

(4) Dissatisfaction with wages and incentives

(5) Bias attitude of Management

(6) Poor working conditions

(7) Dissatisfaction with promotion, recognition, transfer etc.

(8) Lack of Co-ordination

(9) Non-availability of adequate protection, proper instructions,

accommodation etc.

(2) Unavoidable Causes:

(1) Retirement or Death of employer

(2) Marriage in the case of female workers

(3) Permanent disability due to accident or illness

(4) Dismissal or discharged due to inefficiency or disciplinary

ground

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(5) Dissatisfaction with job

(6) Shortage of power, raw materials etc.

(7) Personal responsibilities

(8) Personal betterment with regard to new job

(9) Change in nature of business and plant location.

Effect of Labour Turnover:

(1) Increased cost of recruitment, training and placement

(2) Increased cost of production

(3) Decrease in output due to inefficient or newly recruited

workers

(4) Higher accident rate due to negligence or mishandling of

machines

(5) Low team spirit due to lack of co-operation and co-ordination

between the workers and employers.

The chief aim of the preventive costs which are incurred in order to

keep the workers satisfied and reduce the labour turnover rate as much

as possible. These preventive costs which include the following:

(a) Cost of providing medical facilities, canteen and other

welfare facilities

(b) Cost of administration

(c) Cost of providing better working conditions

(d) Cost of pension, gratuity, provident fund and other retirement

benefits.

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Replacement Costs: These costs include the following :

(a) Cost of recruitment, training and placement

(b) Increase wastages and scrap

(c) Cost of repairs and maintenance including machine

breakdowns

(d) Cost of compensation on account of accidents

(e) Loss of output due to inefficiency or newly recruited

workers.9

FACTORS AFFECTING COST OF LABOUR

1. Assessment of Man Power Requirment: Correct assessment of

manpower requirement will decrease the cost of labour because they are

actually we need, if laborers are more than these numbers, its excess cost

will be suffered by the company and overall cost of labour will increase.

To assess of manpower requirement, is the duty of personnel department.

So, it should be do its duty with best way.

2. Time and Motion Study: In this study, supervisor records time

spent on each job and correct record will reduce excess paid for overtime

to workers.

3. Control over Idle Time and Overtime: Idle time is time when

worker is not doing any production activity due to delay of receiving the

material or electricity cut or any other things. This is loss of business and

it will increase the cost of labour. By continuing supply of raw material,

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review and repair of machines and continue supply of electricity can

reduce idle time loss. But some time, these factors are also not under our

own control. So, we have to depend on others. Overtime cost also can be

optimized by providing good amount for this.

4. Wage System: Wages should be at competitive price. High and

low rate of wages will disturb workers and increase cost of labourers. It

also is on the basis of time or unit produced.

5. Control over Labour Turnover: Labour turnover means losing of

laborers due to not providing good wages or incentive or any other

reason. It will increase the cost of training of new workers and also

errors in production. So labour turnover should minimize as soon as

revealed.

Method of Remuneration

There are two basic methods of wages payment10:

(1) Time Wages System and (2) Piece Wage System.

Under time wage system, wages are paid on the basis of time spent

on the job irrespective of the amount of work done. This is known as

Time Rate or Day Wage System. The unit of time may be a day, a week,

a fortnight or a month. Under piece wage system, remuneration is based

on the amount of work done or output of a worker. This is known as

“Piece Rate System” or “Payment by Result.” Thus, a workman is paid

in direct proportion to his output.

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10. Agarwal N.P., Jain Sugan C., Sharma M.L., Shah C.K. and Mangal S.K., ‘’Cost Accounting’’,

Ramesh Book Depot, Jaipur, 2004, p.3.12.

A variety of bonus and premium plans have been designed to

overcome the drawbacks of two basic methods of wage payments.

A system of incentive plans also takes into consideration the

primary principles of these two basic plans known as Incentive or Bonus

or Premium Plan.

Following are the important methods of remuneration which may

be grouped into:

(1) Time Rate Systems

(2) Piece Rate Systems

(3) Bonus System (or) Incentives Schemes

(4) Indirect Monetary Incentives.

These may be further classified as under:

(1) Time Rate System:

a. At Ordinary Levels

b. At High Wage Levels

c. Guaranteed Time Rates.

(2) Piece Rate System:

a. Straight Piece Rate

b. Piece Rates with Guaranteed Time Rate

c. Differential Piece Rates : (i) Taylor’s Differential Piece

Rate System, (ii) Merrick Differential Piece Rate System

(iii) Gantt Task and Bonus Plan.

(3) Bonus System or Incentive Schemes:

a. Halsey Premium Plan

172

b. Halsey-Weir Premium Plan

c. Rowam Plan

d. Barth Variable Sharing Plan

e. Emerson Efficiency Plan

f. Bedaux Point Premium System

g. Accelerating Premium Plan

h. Group or Collective Bonus Plans.

(4) Indirect Monetary Incentives:

a. Profit-Sharing

b. Co-Partnership

(1) TIME RATE SYSTEM

(a) Time Rate at Ordinary Levels

This is also termed as “Day Wage System” or “Flat Rate System”.

Under this system, wages are paid to the workers on the basis of time

spent on the job irrespective of the quantity of work produced by the

workers. Payment can be made at a rate per day or a week, a fortnight or

a month. The formula for calculation of payment of time rate of ordinary

levels is as follows :

Remuneration or Earnings = Hours Worked ́Rate per Hour

Time wage system is suitable under the following conditions:

1) Where the units of output are difficult to measure, e.g.

watchman.

2) Where the quality of work is more important e.g., artistic

furniture, fine jewellery, carving etc.

173

3) Where machinery and materials used are very sophisticated

and expensive.

4) Where supervision is effective and close supervision is

possible.

5) Where the workers are new and learning the job.

6) Where the work is of a highly varied nature and standard of

performance cannot be established.

Advantages

1) It is simple and easy to calculate.

2) Earning of workers are regular and fixed.

3) Time rate system is accepted by trade unions.

4) Quality of the work is not affected.

5) This method also avoids inefficient handling of materials and

tools.

Disadvantages

1) No distinction between efficient and inefficient worker is

made and hence they get the same remuneration.

2) Cost of supervision are high due to strict supervision used for

high productivity of labour.

3) Labour cost is difficult to control due to more payment may

be made for the lesser amount of work.

174

4) No incentive is given to efficient workers. It will depress the

efficient workers.

5) There are no specific standards for evaluating the merit of

different employees for promotions.

(b) Time Rate at High Levels

Under this system, efficient workers are paid higher wages in order

to increase production. The main object of this method designed to

remove the drawbacks of time rate at ordinary levels. This system is

simple and easily understandable. When higher rate of wages are paid, it

not only reduces labour turnover but also increases production and

efficiency.

(c) Guaranteed Time Rates

Under this method the wage rate is calculated by considering to

changes in cost of living index. Accordingly, the wage rate is varied for

each worker according to the change in cost of living index. This system

is suitable during the period of raising prices.11

(2) PIECE RATE SYSTEM

This is also known as “Piece Wage System” or “Payment By

Result.” Under this system, wages of a worker are calculated on the

basis of amount of work done or output of a worker. Accordingly, a

worker is paid in direct proportion to his output.

175

11. Anthony and Welsch, “Fundamentals of Management Accounting”, 2007, p.223.

Advantages

1) It facilitates direct relation between efforts and reward.

2) This system encourages the efficient workers to increase

production.

3) Under this system efficient workers are recognized and

rewarded:

4) It helps to reduce the cost of supervision and idle time.

5) Tenders or quotations can be prepared confidently and

accurately.

Disadvantages

1) Where a concern is producing large quantities, it is difficult to

fix a piece rate.

2) In order to maximize their earnings, workers working with

high speed may affect their health.

3) The quality of output cannot be maintained.

4) This system is not encouraging to the inefficient workers.

5) Temporary delays or difficulties may affect the earnings of

the workers.

Piece Rate System is suitable where

1) Quality and workmanship are not important.

2) Work can be measured accurately.

3)

176

Quantity of output directly depends upon the efforts of the

worker.

4) Production of standardized goods in a factory.

5) Job is of a repetitive nature.

There are three important methods of paying labour remuneration

falling under this type : (a) Straight Piece Rate (b) Piece Rates with

Guaranteed Time Rates and (c) Differential Piece Rates.

(a) Straight Piece Rate: Under this system workers are paid

according to the number of units produced at a given rate per unit. Thus,

total earnings of each worker are calculated on the basis of his output

irrespective of the time taken by him. The following formula is used for

measuring piece work earning:

Straight Piece Work Earnings = Units Produced ́ Rate Per Hour

(b) Piece Rate with Guaranteed Time Rates: Under this method, the

worker earning from piece work less than the guaranteed minimum

wage, will get the fixed amount of guaranteed time rate. A guaranteed

rate would be paid per hour rate or day rate or week rate.

(c) Differential Piece Rates: This system is designed to provide for

variation of piece rates at different levels of output. Accordingly increase

in wages is proportionate to increase in output. Under this system

efficient workers get ample reward and at the same time inefficient

workers are motivated to earn more. The following are the important

types of differential piece rates :

(i) Taylor’s Differential Piece Rates System: F.W. Taylor, who is

the father of scientific management, introduced this plan.

Under this system, two piece rates are applicable on the basis

177

of standard of performance established. Accordingly one is

high rate and the other one is lower rate. Thus high piece rate

is applicable for standard and above the standard

performance. Lower piece rate for those workers with below

the standard performance.

(ii) Merrick’s Differential Piece Rates System: Under this

method, three piece rates are applied with different levels of

performance accordingly.

(iii) Gantt’s Task Bonus Plan: This system is designed by Henry

L. Gantt. Under this system standard time for every task is

fixed through time and motion study. The main feature of this

system is a good combination of time rate, differential piece

rate and bonus. In this system day wages are guaranteed to all

workers.

3. BONUS OR INCENTIVES SCHEMES

Incentive Scheme of wage payment is also known as Premium

Bonus Plans. Introduced in order to increase production with ensuring

proper industrial climate. Wage incentive plans may be of two types :

(A) Individual Incentive Plans and (B) Group Incentive Plans.12

A. Individual Incentive Plans

Under individual incentive plans, remuneration can be measured on

the performance of the individual worker. In the case of the group

incentive scheme earnings can be measured on the basis of the

productivity of the group of workers or entire work force of the

178

12. Kumar Nirmal Prasad, “Cost Accounting”, ICWAI, icwai.intermediate_notes, Jan 15, 2013.

organization. Various types of incentive schemes are combinations of

time and piece rate systems. The following are the important individual

incentive plans discussed below :

(1) Halsey Premium Plan: This Plan was developed by F.A. Halsey.

This system also termed as Split Bonus Plan or Fifty-Fifty Plan. Under

this plan, Standard time is fixed for each job or operation on the basis of

past performance. If a worker completes his job within or more than the

standard time then the worker is paid a guaranteed time wage. If a

worker completes his job within or less than the standard time, then he

gets a bonus of 50% of the time saved plus normal earnings. Under this

method, the total earnings is calculated as follows:

Total Earning = Guaranteed Time Wages + Bonus of 50% of Time saved

(or)

Total Earning = T ́R + 50% (S - T) R

Where T = Time Taken; R = Hourly Rate; S = Standard Time

Total Earnings = Time taken ́ hourly rate

+ 50

100 (Time Saved ́Hourly Rate)

Merits:

1) It is simple to understand.

2) Total earnings of each worker can be easy to calculate.

3) Both employer and employee get equal benefit of time saved.

4) This system not only benefits efficient worker but also

provides average worker to get guaranteed minimum wages.

5) This system is based on time saved and it can reduce the

labour cost.

179

Demerits:

1) Lack of co-operation among the employees.

2) Under this system establishment of standard is very difficult.

3) Earning are reduced at high level of efficiency.

(2) The Halsey-Weir Scheme: Under this system the worker gets

the bonus of 30% of the time saved instead of 50% of time saved under

Halsey Plan. Except for this, Halsey Plan and Halsey-Weir Systems are

similar in all other respects.

(3) Rowan Plan: This plan was introduced by James Rowan of

England. It was similar to the Halsey Plan in many respects except that it

differs in calculation of bonus. Under this system, bonus is determined

as the proportion of the time taken which the time saved bears to the

standard time allowed.

(4) Emerdon’s Efficiency Sharing Plan: Under this plan, earning of

a worker is by combining guaranteed day wages with a differential piece

rate. Accordingly the level of efficiency is determined on the basis of

establishment of standard task for a unit of time. If the level of worker’s

efficiency reaches 67% the bonus is paid to him at a normal rate. The

rate of bonus increases in a given rate as the output increases from 67%

to 100% efficiency. Above 100% efficiency, the bonus increases to 20%

of the wage earned plus additional bonus of 1% is added for each

increase of 1% in efficiency.

(5) Bedaux Point Premium System: This plan was introduced by

Charles E. Bedaux in 1911. Under this plan, standard time fixed for each

operation or job is expressed in terms of Bedaux point or ‘B’. For

example, a standard time of 360 B means the operation or job should be

180

completed within 360 minutes. The chief advantage of this plan is that it

can be applied to any kind of job. Under this system, worker is paid at

the time for actual hours worked and 75% of the wages for the time

saved are paid as bonus to the worker and 25% to the foremen,

supervisors etc. Following is the formula for calculation of total wages

of a worker:

Total Earnings = S ́R + 75% of R (S - T)

(6) Accelerating Premium Bonus Plan : Under this plan, bonus is

determined on the basis of time saved unlike a fixed percentage under

Halsey Plan and as decreasing percentage under Rowan Plan. The bonus

is paid to workers at an increased rate. This provides increasing

incentives to efficient workers.

B. Group or Collective Bonus Plan

The incentive schemes explained so far are applicable to individual

performance depending directly on production. However it is not the

individual workers who produce the goods or services (operation) alone

but group of several other workers are required to jointly perform a

single operation. It is, therefore, essential that a group incentive scheme

should be introduced. Bonus is calculated for a group incentive scheme.

The bonus is calculated for a group of workers and the total amount is

distributed among the group of workers on anyone of the following

basis:

(a) Equally by all the workers of the group.

(b) Pro rate on the time rate basis.

181

(c) Pre determined percentage basis.

(d) Specified proportion basis.

Following are the important types of group incentive bonus plans:

(1) Budgeted Expenses bonus plan

(2) Priest Man bonus Plan

(3) Towne’s Gain-sharing Plan

(4) Scanlon Plan

(1) Budgeted Expenses Bonus Plan: Under this method, bonus is

determined on the basis of savings in actual expenditure compared with

total budgeted expenditure.

(2) Priest man Bonus Plan: Under this plan standard performance is

fixed by the management and committee of works. The group of workers

get bonus when actual performance exceeds the standard performance

irrespective of individual’s efficiency or inefficiency.

(3) Towne’s Gain-sharing Plan: Under this plan, bonus is calculated

on the basis of savings in labour cost. The group of workers get bonus

when actual costs is less than the standard costs, one -half of the savings

is distributed among workers including foremen in proportion with the

wages earned.

(4) Scanlon Plan: Scanlon Plan is designed with the chief aim of

reducing the cost of operations in order to increase the production

efficiency. This plan is generally applicable in industries where the

operation cost is high. Under this scheme, bonus is determined on the

182

basis of standard costs or wastages and percentage of the reduction in

operation cost.13

4. INDIRECT MONETARY INCENTIVE

Indirect schemes are regarded beneficial to both employers and

workers. In this regard, under indirect monetary incentives by giving

them a share of profit and introducing co-partnership scheme or as they

have become partners in the business in order to make a very profitable

enterprise.

Profit Sharing: Profit Sharing and bonus is also known as Profit

sharing Bonus. Under this scheme, there is an agreement between the

employer and employee by which employee receives a share, fixed in

advance of the profits. Accordingly profit sharing bonus refers to the

distribution of profit on the basis of a certain percentage of one’s

monthly earnings. The amount to be distributed depends on the profits

earned by an enterprise. The proportion of the profits to be distributed

among the employees is determined in advance.

Co-partnership: This system provides not only a worker to become

partner in the business but also to share in the profit of the concern.

There are different degrees of partnership and share of responsibilities

allowed to the workers to take part in its control.14

5. NON-MONETARY INCENTIVE SCHEMES

Under this system, employees are provided better facilities, instead

of additional monetary payments. Some of the examples of

183

13. Maheshwari S.N., “Cost and Management Accounting”, Sultan Chand & Sons, 2008, p.121.

14. Sharma H.L., Bhardwaj D.K. and Biyani Sanjay, “Fundamentals of Accounting”, R.B.D.

Publications, Jaipur, 2011, p.1.18.

non-monetary incentives are free education for children, rent free

accommodation, medical facilities, canteen facilities, welfare facilities,

and entertainment facilities etc.

*****

184

ANALYSIS OF ACCOUNTING FOR LABOUR AND COST

CONTROL

The analysis of accounting for labour and cost control of the

companies under study has been made under the following heads

1. Direct Labour Cost to Prime Cost

Direct labour cost is one of the components of prime cost and bears

an important part in prime cost after the direct materials. The ratio of

direct labour to prime cost of the companies under study has been used

by using the following formula-

Ratio of Direct Labour Cost to Prime Cost = Direct Labour Cost

Prime Cost

The ratio of direct labour to prime cost of the companies under

study has been shown in the following Table 4.1.

Table 4.1

Direct Labour to Prime Cost Ratio of the Companies under Study

(From 2008-09 to 2012-13)(Ratio in Times)

Source: Annual Reports & Accounts of the companies under study for the period from 2008-09 to

2012-13.

184

Years RSWM BSL MSUML STIL

2008-09 0.10 0.14 0.08 0.11 2009-10 0.10 0.15 0.09 0.12 2010-11 0.10 0.15 0.07 0.10 2011-12 0.09 0.14 0.07 0.10 2012-13 0.10 0.16 0.08 0.11 Average 0.10 0.15 0.08 0.11

S.D. 0.00 0.01 0.01 0.01 C.V.(%) 0.00 6.67 12.50 9.09

RSWM: Table 4.1 shows that the ratio of direct labour cost to prime

cost in RSWM showed a consistent trend during the whole period of

study except in the year 2011-12 otherwise the ratio of direct labour cost

to prime cost was 0.10 times for the whole period of study though there

was an increasing trend both in the amount of direct labour and prime

cost. It signifies that per unit expenditure on direct labour remained

consistent during the period of study denoting an efficient control over

the direct labour. The average of the ratio was 0.10 times which can be

regarded satisfactory. The coefficient of variation was nil as there was no

fluctuation because the ratio of direct labour to prime cost remained

same throughout the period of study.

BSL: It can be observed from the above table that the ratio of direct

labour cost to prime cost in BSL showed a consistent trend during the

whole period of study and fluctuated within the range of 0.16 times in

2012-13 to 0.14 times in 2008-09. It is to be noted here that the direct

labour cost and the prime cost of the production showed an increasing

trend signifying an increase in the production and remaining a consistent

ratio of direct labour cost to prime cost denotes that the per unit cost of

direct labour cost to prime cost remained same throughout the period

under study. It denotes an efficient management and control over the

direct labour cost. The average of the ratio was 0.15 times which can be

regarded satisfactory. The coefficient of variation was 6.67 percent

denoting a consistent trend which should be maintained in future also.

Moreover, it is suggested that the control over the direct labour cost

should also be maintained in the similar manner.

185

MSUML: From the table, it can be ascertained that the ratio of

direct labour cost to prime cost in MSUML showed a consistent trend

during the whole period of study and fluctuated within the range of 0.09

times in 2009-10 to 0.07 times in 2010-11. A consistent trend of the ratio

of direct labour cost to prime cost reveals that the per unit cost of direct

labour remained almost same although there was increase in the volume

of production as the direct labour cost and the prime cost showed an

increasing trend during the whole period of study except in the year

2012-13 when there was a marginal decrease in the prime cost. The

average of the ratio was 0.8 times which can be regarded satisfactory as

it denotes an effective control over the direct labour expense. The

coefficient of variation was 12.50 percent denoting a consistent trend

and it can be suggested that the management of MSUML should try to

maintain the same policy in future also.

STIL: Table 4.1 reveals that the ratio of direct labour cost to prime

cost in STIL showed a consistent trend during the whole period of study

and this ratio fluctuated within the range of 0.12 times in 2009-10 to

0.10 in 2010-11 despite an increasing trend in the commercial

production of the company because the direct labour cost and the prime

cost showed an increasing trend during the period of study. The

consistent trend shows that the management of the company kept the per

unit cost of labour intact which gives an indication of an efficient

management. The average of the ratio was 0.11 times which can be

regarded satisfactory. Since there was no much fluctuation so the

186

coefficient of variation was 9.09. It is therefore, suggested that the

management of the company should follow the same policy in future

also.

An overall analysis of the ratio of direct labour cost to prime cost

reveals that the average of this ratio was highest in BSL as the average

was 0.15 times otherwise for RSWM, MSUML and STIL the ratio

fluctuated within 0.08 to 0.11 times which means that the expenditure on

direct labour cost was under control in comparison to the expenses

incurred on direct material cost. It is suggested that the management of

these companies should try to follow the same practice in future. The

fluctuations were negligible as the coefficient of variation was within the

allowable limits.

Test of Significance (t-test)

Test of significance has been applied to test the hypothesis. For this

purpose t-test has been applied by comparing one company with another

company.

(a) Between RSWM and BSL

Null Hypothesis: There is no significant difference in the ratio of

direct labour cost to prime cost of RSWM and BSL.

Value of t = 11.17

Critical Value of t at 5 percent level of significance (for V=8) is 2.306.

187

Decision: The null hypothesis is rejected because the computed

value of t is more than the critical value of t at 5 percent level of

significance. Hence, it can be concluded that the difference in the ratio

of direct labour cost to prime cost of RSWM and BSL is significant.

(b) Between RSWM and MSUML


direct labour cost to prime cost of RSWM and MSMUL.

Value of t = 4.47

Critical Value of t at 5 percent level of significance (for V=8) is 2.306




of direct labour cost to prime cost of RSWM and MSUML is significant

(c) Between RSWM and STIL


direct labour cost to prime cost of RSWM and STIL.

Value of t = 2.23


Decision: The null hypothesis is accepted because the computed

value of t is less than the critical value of t at 5 percent level of


of direct labour cost to prime cost of RSWM and STIL is not significant.

(d) Between BSL and MSUML

188


direct labour cost to prime cost of BSL and MSUML.

Value of t = 11.06





of direct labour cost to prime cost of BSL and MSUML is significant.

(e) Between BSL and STIL


direct labour cost to prime cost of BSL and STIL.

Value of t = 6.32





of direct labour cost to prime cost of BSL and STIL is significant.

(f) Between MSUML and STIL


direct labour cost to prime cost of BSL and STIL.

Value of t = 4.74


189




of direct labour cost to prime cost of MSUML and STIL is significant.

Analysis of Variance (F-Test)

To test the significance of direct labour cost to prime cost ratio of

the textile companies under study F test has been applied and following

hypotheses have been tested

(i) Null Hypothesis (H0) : There is no significant difference in the

direct labour cost to prime cost ratio of the companies under study.

(ii) Null Hypothesis (H0): There is no significant difference in the

year-wise direct labour cost to prime cost ratio of the textile companies

under study.

Table 4.2

ANOVA TABLE

(i) F-Test Between the Companies

F = HigherVariance

SmallerVariance =

0 004333

0 000025173 32

.

..=

190

Source Sum Degree of Freedom

(d.f.)

Variance (Sum /d.f)

F Ratio

Between Companies (SSC) 0.013 (c-1)=(4-1)=3 0.004333

F= 173.32 (Between Companies)

Within Companies (SSR) 0.0005 (r-1)=(5-1)=4 0.000125

Error (SSE) 0.0003 (c-1)(r-1)=12 0.000025

F=5.00 (Within Companies)

Critical value of F at 5 percent level of significance (V1 = 3 and V2

= 12) is 3.49

Decision: Since the calculated value of F is more than the critical

value of F at 5 percent level of significance, therefore the Null

Hypothesis is rejected and it is concluded that the difference in the direct

labour cost to prime cost ratio of the textile companies under study is

significant.

(ii) F-Test within the Companies

F = HigherVariance

SmallerVariance =

0 000125

0 0000255

.

.= .00


= 12) is 3.26



Hypothesis is rejected and it is concluded that the year-wise difference in

the direct labour cost to prime cost ratio of the textile companies under

study is significant.

2. Direct Labour Cost to Factory Cost Ratio

Direct labour cost to factory cost ratio plays an important role

towards the absorption of overheads. While calculating the quotation or

tender price this ratio is used as the base for estimation of other

191

overheads. In the present study this ratio has been calculated as follows-

Ratio of Direct Labour Cost to Factory Cost = Direct Labour Cost

Factory Cost

The ratio of direct labour cost to factory cost of the textile

companies under study has been calculated and presented in the

following Table 4.3.

Table 4.3

Direct Labour Cost to Factory Cost Ratio

of the Companies under Study



2012-13.

RSWM: It can be noted from the above table 4.3 that the ratio of

direct labour cost to factory cost showed a consistent trend during the

whole period of study and varied within the range of 0.09 times to 0.08

times. The average of the ratio was 0.086 times which can be regarded

satisfactory. Moreover it can be noted from the above that the proportion

of direct labour cost to factory cost remained same despite increase in

the production because the direct labour cost and the factory cost

192


2008-09 0.09 0.12 0.07 0.10 2009-10 0.09 0.12 0.07 0.11 2010-11 0.08 0.13 0.06 0.09 2011-12 0.08 0.12 0.06 0.09 2012-13 0.09 0.14 0.07 0.09 Average 0.086 0.126 0.066 0.096

S.D. 0.005 0.008 0.005 0.008 C.V.(%) 5.81 6.35 7.58 8.33

showed an increasing trend during the period of study. The coefficient of

variation was 5.81 percent showing a consistent trend which should be

maintained in future also. Further it can be suggested that the

management of the company should follow the same practice in future

also.

BSL: The table shows that the ratio of direct labour cost to factory

cost in BSL showed a consistent trend during the whole period of study.

During the years 2008-09 and 2009-10, this ratio was 0.12 which

marginally increased to 0.13 times in 2010-11 but marginally decreased

to 0.12 times in 2011-12 and finally increased to 0.14 times in 2012-13.

The production level of the company continuously increased but the

consistency of the ratio shows the consistent relationship of direct labour

cost and prime cost i.e. the per unit direct labour cost remained same.

The average of the ratio was 0.126 times which can be regarded

satisfactory. The coefficient of variation was 6.35 percent denoting a

consistent trend and it is suggested that the management of the company

should follow the same policy in future to have an effective control over

the direct labour cost.

MSUML: It is evident from the above table that the ratio of direct

labour cost to factory cost in MSUML showed a consistent trend during

the whole period of study and fluctuated within the range of .07 times to

.06 times during the period of study. The average of the ratio was 0.066

times for the period of study denoting a favorable position of direct

labour cost and signifies that there was an effective control over the

193

direct labour cost. The coefficient of variation was 7.58 percent denoting

a consistent trend. It can be suggested that the management of MSUML

should continue with the same labour policy in future also.

STIL: It can be ascertained from the above table that ratio of direct

labour cost to factory cost in STIL showed a fluctuating but a consistent

trend during the period of study. Initially during the year 2008-09, the

ratio of direct labour cost to factory cost was 0.10 times which

marginally increased to 0.11 times in 2009-10 and then after it decreased

and remained unchanged at 0.09 times during the remaining period of

study. During the course of study the commercial production of the

company showed an increasing trend and accordingly the factory cost

and direct labour cost increased but because of remaining the per unit

cost of direct labour unchanged the ratio showed a consistent trend. The

average of the ratio was 0.096 times which can be regarded favorable

and denotes an effective management policy. The coefficient of variation

was 8.33 percent showing a consistent trend. It can be suggested that the

management of the company should continue with the same policy in

future also.

On the whole it can be said that the ratio of direct labour cost to

factory cost for all the companies under study showed a consistent trend

and per unit direct labour cost almost remained unchanged.. It denotes

an effective control over the direct labour cost and it is suggested that the

management of these companies should follow the same practice in

future also.


194


purpose t test has been applied by comparing one company with another

company.



direct labour cost to factory cost of RSWM and BSL.

Value of t = 9.12





of direct labour cost to factory cost of RSWM and BSL is significant.



direct labour cost to factory cost of RSWM and MSMUL.

Value of t = 6.32





of direct labour cost to factory cost of RSWM and MSUML is

significant.

195



direct labour cost to factory cost of RSWM and STIL.

Value of t = 2.369





of direct labour cost to factory cost of RSWM and STIL is significant.



direct labour cost to factory cost of BSL and MSUML.

Value of t = 14.21





of direct labour cost to factory cost of BSL and MSUML is significant.



direct labour cost to factory cost of BSL and STIL.

196

Value of t = 5.93





of direct labour cost to factory cost of BSL and STIL is significant.



direct labour cost to factory cost of BSL and STIL.

Value of t = 7.11





of direct labour cost to factory cost of MSUML and STIL is significant.


To test the significance of direct labour cost to factory cost ratio of

the companies under study F-test has been applied and following

hypotheses have been tested.


direct labour cost to factory cost ratio of the textile companies under

study.

197


year-wise direct labour cost to factory cost ratio of the textile companies

under study.

Table 4.4

ANOVA TABLE


F = HigherVariance

SmallerVariance =

0 003000

0 000042

.

.= 71.43


= 12) is 3.49




labour cost to factory cost ratio of the textile companies under study is

significant.

(i) F-Test within the Companies

198


(d.f.)

Variance (Sum /d.f)

F Ratio




Error(SSE) 0.0005 (c-1)(r-1)=12 0.000042


F = HigherVariance

SmallerVariance =

0 000075

0 000042

.

.= 1.79


= 12) is 3.26

Decision: Since the calculated value of F is less than the critical


Hypothesis is accepted and it is concluded that the year-wise difference

in the direct labour cost to factory cost ratio of the textile companies

under study is not significant.

3. Direct Labour Cost to Cost of Production

This ratio establishes the relationship between the direct labour cost

and cost of production. A lower ratio is always preferred provided that

the management has kept the per unit cost of direct labour cost intact

because the cost of production will be higher and accordingly the ratio

will be lower. In the present study the ratio of direct labour cost to cost

of production has been calculated by using the following formula-

Ratio of Direct Labour Cost to Cost of Production

= Direct Labour Cost

Cost of Production

199


2008-09 0.09 0.11 0.07 0.09 2009-10 0.08 0.12 0.07 0.10 2010-11 0.08 0.13 0.06 0.09 2011-12 0.08 0.12 0.06 0.08 2012-13 0.09 0.13 0.07 0.09 Average 0.0840 0.1220 0.0660 0.0900

S.D. 0.0049 0.0070 0.0049 0.0063 C.V.(%) 5.83 5.83 7.42 7.00

The ratio of direct labour cost to cost of production has been

presented in the following Table 4.5.

Table 4.5

Direct Labour Cost to Cost of Production Ratio




2012-13.

RSWM: It can be noted from the table that the ratio of direct labour

cost to cost of production in RSWM showed almost a consistent trend

during the period of study. During the year 2008-09 the ratio of direct

labour cost to cost of production was 0.09 which reduced to 0.08 times

in 2009-10 and remained unchanged in next two years and marginally

increased to 0.09 times in 2012-13. The average of the ratio was 0.0840

denoting a satisfactory position because the ratio remained unchanged

during the whole period of study except some marginal changes; though

the direct labour cost and cost of production had shown an increasing

trend during the period of study. The coefficient of variation was 5.83

percent denoting a consistent trend and it can be suggested that the

management of the company should follow the same policy in future

also.

BSL: From the table 4.5, it can be seen that the direct labour cost to

cost of production ratio in BSL showed an increasing cum consistent

trend during the period of study. The direct labour cost to cost of

production ratio during the year 2008-09 was 0.11 times which increased

200

to 0.12 times in 2009-10 and to 0.13 times in 2010-11. The ratio

decreased to 0.12 times in 2011-12 but increased to 0.13 times in

2012-13. The average of the ratio was 0.122 for the period of study

denoting a satisfactory position of direct labour cost management.

Despite an increasing trend of the production the ratio remained

consistent that denotes an effective control over the direct labour cost

expenditure because the per unit labour cost remained same. The

coefficient of variation was 5.74 percent denoting a consistent trend and

it can be suggested that the management of the company should try to

follow the same policy in future also.

MSUML: Table 4.5 reveals that similar to other companies the ratio

of direct labour cost to cost of production showed a consistent trend

throughout the period under study and the ratio fluctuated within the

range of 0.07 times to 0.06 times. The average of the ratio was .0660

denoting a favorable position of the company as regards the expenditure

on direct labour cost. The coefficient of variation was 7.42 percent

showing a consistent trend and it is suggested that the management of

the company should follow the same practice in future also because even

after the increase in the production the cost per unit of direct labour cost

has remained same denoting an effective control of the management.

STIL: The ratio of direct labour cost to cost of production in STIL

showed a fluctuating cum consistent trend during the period of study.

During the year 2008-09 the ratio was 0.09 times which increased to

0.10 times in 2009-10 but decreased to 0.9 times in 2010-11 and further

201

to 0.08 times in 2011-12. This ratio increased to 0.09 times in 2012-13.

The average of the ratio was 0.09 times denoting a favorable position of

the direct labour cost and it signifies an effective direct labour cost

management. The coefficient of variation was 7.00 percent showing a

consistent trend of the ratio. It can be suggested that the management of

the company should follow the same policy in future also.

An overall analysis of the ratio of direct labour cost to cost of

production amongst all the textile companies under study shows that

despite the increasing trend of the production the cost per unit of direct

labour cost remained same in all the companies during the period of

study which denotes an effective management and control over the direct

labour cost. The fluctuations were also negligible. It is suggested that the

management of these companies should continue with the same policy in

future also.



purpose t-test has been applied by comparing one company with another

company.



direct labour cost to cost of production of RSWM and BSL.

Value of t = 9.38


202




of direct labour cost to cost of production of RSWM and BSL is

significant.



direct labour cost to cost of production of RSWM and MSMUL.

Value of t = 5.80





of direct labour cost to cost of production of RSWM and MSUML is

significant.



direct labour cost to cost of production of RSWM and STIL.

Value of t = 1.69


Decision: The null hypothesis is accepted because the computed

value of t is less than the critical value of t at 5 percent level of


203

of direct labour cost to cost of production of RSWM and STIL is not

significant.



direct labour cost to cost of production of BSL and MSUML.

Value of t = 14.75





of direct labour cost to cost of production of BSL and MSUML is

significant



direct labour cost to cost of production of BSL and STIL.

Value of t = 7.55





of direct labour cost to cost of production of BSL and STIL is

significant.

204



direct labour cost to cost of production of BSL and STIL.

Value of t = 6.77





of direct labour cost to cost of production of MSUML and STIL is

significant.


To test the significance of direct labour cost to cost of production

ratio of the companies under study F test has been applied and following



direct labour cost to cost of production ratio of the textile companies

under study.

205


(d.f.)

Variance (Sum /d.f)

F Ratio




Error(SSE) 0.27 (c-1)(r-1)=12 0.0225

F=1.12 (Within Companies0


year-wise direct labour cost to cost of production ratio of the textile

companies under study.

Table 4.6

ANOVA TABLE


F = HigherVariance

SmallerVariance =

0 0233

0 0225

.

.= 1.03


= 12) is 3.49



Hypothesis is accepted and it is concluded that the difference in the

direct labour cost to cost of production ratio of the companies under

study is not significant.


F = HigherVariance

SmallerVariance =

0 0225

0 0200

.

.= 1.12

Critical value of F at 5 percent level of significance (V1 = 12 and

V2 = 4) is 5.91



206

Hypothesis is accepted and it is concluded that the year wise difference

in the direct labour cost to cost of production ratio of the companies

under study is not significant.

4. Direct Labour Cost to Cost of Sales

This ratio shows the proportion of direct labour cost towards the

cost of sales. The ratio of direct labour cost to cost of sales has been

calculated by using the following formula-

Ratio of Direct Labour Cost to Cost of Sales = Direct Labour Cost

Cost of Sales

The direct labour cost to cost of sales ratio of the textile companies

under study has been shown in the following Table 4.7.

Table 4.7

Direct Labour Cost to Cost of Sales Ratio




2012-13.

207


2008-09 0.08 0.12 0.07 0.09 2009-10 0.08 0.12 0.07 0.11 2010-11 0.08 0.13 0.06 0.09 2011-12 0.08 0.13 0.06 0.09 2012-13 0.09 0.13 0.07 0.09 Average 0.082 0.126 0.066 0.094

S.D. 0.004 0.005 0.004 0.008 C.V.(%) 4.88 3.97 7.42 8.51

RSWM: The above Table 4.7 shows that the ratio of direct labour

cost to cost of sales in RSWM showed a consistent trend during the

whole period of study except in the year 2012-13. The ratio of direct

labour cost to cost of sales remained constant at 0.08 times during the

first four years of study and marginally increased to 0.09 times in

2012-13. The consistency of the ratio shows that per unit cost of direct

labour remained same irrespective of production. The average of the

ratio was 0.82 times denoting a satisfactory position which should be

continued in future also. The coefficient of variation was 4.88 percent

showing a consistent trend which should be maintained.

BSL: As depicted by Table 4.7, it can be said that the direct labour

cost to cost of sales ratio in BSL showed a consistent trend during the

whole period of study. Initially during the year 2008-09, the ratio was

0.12 times which remained same in 2009-10 and marginally increased to

0.13 times in 2010-11 and remained unchanged up to the last year of

study. The consistent trend of the ratio shows that the relationship of per

unit cost and direct labour cost was intact during the whole period of

study. The average of the ratio was 0.126 times which can be regarded

satisfactory. The coefficient of variation was 3.97 percent denoting a

consistent trend and it can be suggested that the management of the

company should follow the same policy in future.

MSUML: The ratio of direct labour cost to cost of sales ratio in

MSUML showed a consistent trend during the period of study like other

companies under study. During the year 2008-09 the direct labour cost to

cost of sales ratio was 0.07 times which remained same in the following

208

year but decreased to 0.06 times in 2010-11 and remained same in

2011-12. This ratio again marginally increased to 0.07 times in 2012-13.

The average of the ratio was 0.0660 denoting that the proportion of

direct labour cost was very low which shows that the company followed

an effective control policy for the direct labour cost which should be

followed in future also. The coefficient of variation was 7.42 percent

denoting a consistent trend which should be maintained in future also.

STIL: The direct labour cost to cost of sales ratio in STIL showed a

consistent trend during the whole period of study except in the year

2009-10. During the whole period of study the ratio of direct labour cost

to cost of sales was intact at 0.09 times except in the year 2009-10 when

it was 0.11. The average of the ratio was 0.094 times which is though

very low but can be regarded in favour of the company. The coefficient

of variation was 8.51percent denoting a consistent trend and it can be

inferred that the management should continue with the same policy in

future also.

An overall comparison of the ratio of direct labour cost to cost of

sales amongst all the textile companies under study reveals that the

proportion of direct labour cost to sales was low and remained consistent

throughout the period of study. Lower proportion of direct labour cost

signifies that there is no problem of labour in textile industry and

workers are easily available at cheaper rate. However, it denotes a good

management and it is suggested that the same policy should be

continued by the management of these companies under study.

209



purpose t test has been applied by comparing one company with another

company.



direct labour cost to cost of sales of RSWM and BSL.

Value of t = 15.45





of direct labour cost to cost of sales of RSWM and BSL is significant.



direct labour cost to cost of sales of RSWM and MSMUL.

Value of t = 5.62

Critical Value of t at 5 percent level of significance (for V=8) is

2.306




210

of direct labour cost to cost of sales of RSWM and MSUML is

significant.



direct labour cost to cost of sales of RSWM and STIL.

Value of t = 3.01





of direct labour cost to cost of sales of RSWM and STIL is significant.



direct labour cost to cost of sales of BSL and MSUML.

Value of t = 19.35





of direct labour cost to cost of sales of BSL and MSUML is significant.


211


direct labour cost to cost of sales of BSL and STIL.

Value of t = 7.55





of direct labour cost to cost of sales of BSL and STIL is significant.



direct labour cost to cost of sales of BSL and STIL.

Value of t = 6.70





of direct labour cost to cost of sales of MSUML and STIL is significant.


212


(d.f.)

Variance (Sum /d.f)

F Ratio




Error (SSE) 0.0005 (c-1)(r-1)=12 0.000042


To test the significance of direct labour cost to cost of sales ratio of

the textile companies under study F-test has been applied and following



direct labour cost to cost of sales ratio of the companies under study.


year-wise direct labour cost to cost of sales ratio of the companies under

study.

Table 4.8

ANOVA TABLE


F = HigherVariance

SmallerVariance =

0 003000

0 000042

.

.= 71.48


= 12) is 3.49




labour cost to cost of sales ratio of the textile companies under study is

significant.


F = HigherVariance

SmallerVariance =

0 000042

0 000025

.

.= 1.68

213

Critical value of F at 5 percent level of significance (V1 = 12 and

V2 = 4) is 5.91



Hypothesis is accepted and it is concluded that the difference in the

year-wise direct labour cost to cost of sales ratio of the textile

companies under study is not significant.

*****

214

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