Labour Cost

• Wages paid to workers during an accounting period on daily, weekly, monthly, or job basis, plus payroll and related taxes and benefits (if any).

The Manager’s Thought

Prime cost of concern for the HRD

Important part of production

process

Decides price of product

LABOUR COST IS:

Labour Costs

Direct

That portion of wages or salaries which can be

identified & charged to a single costing unit

Indirect

Cannot be correlated with production of specific goods, applicable to mfg activities

generally (paid to foreman,stockkeeper,clerical

staff)

CLASSIFICATION

Other Benefits

• Employees contribution to PF, production & profit bonus, holiday & vacation bonus, old age pension

Financial

• Subsidised food & housing, transport to the workplace,employee’s children education , recreational facilities etc.Non-

financial

System of wages

• Should satisfy employees & employer

System of wages

Time Wage or Day Rate

Piece Rate or Piece Work

Time Wage or Day Rate system

• Wages to worker are paid on time basis irrespective of quantum of production

• Wage measured on basis of unit of time, i.e., hourly, daily, weekly or monthly

• Formula:

SUITABILITY :Volume of production is not within the control of labor. E.g. Oil Refinery

• The nature of work is such that there is no basis for incentive plan. E.g. Night watchman

Hrs worked X Rate per Hr

Piece Rate or Piece Work

• Remuneration of work is paid on the basis of production and not time taken by to perform the work

• Simple and most commonly used incentive schemes• Formula:

SUITABILITY : • If the productivity is closely related to skill & efforts• The unit cost can be easily determined • If it is possible to fix a fair and acceptable piece rate

Units Produced X Rate per Unit

Why Control labour costs?

• Inefficiency of labor• Wasting material due to improper supervision• Idle time – normal & abnormal causes.• Unusual overtime work• Inclusion of dummy names in payrolls, etc

Controlling accomplished by:

Personnel department

Rate or time & motion study

Production planning

Budgeting

Engineering department

Time - keeping

Cost accounting department

Payroll department

OTHER COSTS

• Idle time • Overtime• Bonus & premiums• Incentive wage plans• Group bonus schemes• Co –partnership schemes

Treatment of Idle Time Cost

• Treatment of normal idle time cost

(i) Treated as direct wages

(ii) Treat as an item of factory expenses and recover as indirect charges

• Treatment of abnormal idle time cost

(i) Does not form part of cost of production

(ii) Directly transferred to Costing Profit & Loss Account without disturbing the normal costs

ELIMINATE ABNORMAL CAUSES & MINIMIZE NORMAL ONES

Overtime & its treatment

• Time spend over & above the normal working hours on the job

• In India, if worker works more than 9hrs a day or 48 hrs a week.

I. Direct cost- customer pays due to urgency

II. P/L A/c- to makeup any shortfall in production due to some fault of management or due to abnormal causes like floods

III.General overhead- when handling seasonal pressures

Bonus and premium schemes

•To increase the production and productivity•To raise the morale•To retain the services of good workers•To establish better labor-management relations

Group bonus schemes•To develop team spirit •Where output is more dependent upon the efforts on the group rather than

the individual worker.• METHODS

•Equally by all workers in the group.•Pro rata on the time rate basis. •Predetermined percentage basis.•Specified proportion basis depending upon the different skills of the

workers.

Co-partnership / shares•Provide an opportunity to workers to share the prosperity of the company

by not only being the wage earner but also the partner of the undertaking.•The profits to be distributed are determined through the negotiation between

the employer and the employee.•Normally it is paid in cash, but it may be in the form of shares of the

undertaking.

Types of incentive wage plans

1. Halsey premium plan

2. Halsey- weir premium system

3. Rowan plan

4. Bedaux point premium system

5. Taylor’s differential piece rate system

6. Merrick differential piece rate system

7. Gantt task & bonus plan

8. Emerson efficiency system

TYPES OF INCENTIVE WAGE PLANS

Halsey Premium Plan

• The worker is paid a % of the time saved over the standard rate per piece.

• Standard time is fixed for each job/operation• If the labour completes at standard time or more he is given the

standard price.• If time saved- wages given for actual hours saved as a bonus.

Time taken* rate + %(standard time-time taken)* rate

Cont…

Rowan System

The bonus hours are calculated as the proportion of the

time taken which the time saved bears to the standard time allowed

Time taken* rate + standard time – time taken* time taken* rateStandard time

Question ???

Time allowed (standard time): 60 hrs.Rate of wages: Rs10 per hour

Factory A

Halsey PlanRowan Plan

Factory B

Time taken =48hrsTime taken =36hrs

Required: Total earnings according to both the systems

The formula of calculating wages by Halsey premium method and Rowan’s method are as follows:

Time taken* rate + %(standard time-time taken)* rate

Time taken* rate + standard time – time taken* time taken* rateStandard time

Wage at location A: 36 *10= 360 RsWage at location B: 48 * 10=480 Rs

Bonus : 60-36 * 36 *10= 144 Rs 60

Location A

Bonus : 50% time saved * rate per hr=50% (60-48) * 10=60 Rs

Location B

‘A’(Rowan’s method)

Rs.

‘B’(Halsey’s method)

Rs.

Wages:Bonus:

360144

48060

Total: 504 540

Merrick Differential Piece Rate System

• Has 3 categories for payment

• Daily wages are not guaranteed.

20% above Normal rate

Above 100%

10% above Normal rate

Up to 100%

Normal rateUp to 83%

Price rate applicable

Efficiency

Methods of measuring workforce performance

– Labour turnover

– Labour productivity

– Absenteeism

Labour turnover

• Labour turnover (staff turnover) can be defined as the rate of change in a firm’s labour force.

• look at labour turnover over a period of 1 year.

Turnover and costing

Labour turnover

( High / Low )

Preventive costsCosts incurred to keep turnover as low as possible

Replacement costs

Costs due to replacement of

employees

Calculation Methods

1.Separation method:• no.of separations in a period/avg total no.of

workers in a period * 100

2.Flux or separation cum replacement method:• No. of separation+ no.of replacement/ avg total

no.of workers in a period *100

3.Replacement method:• No.of workers replaced during a period/avg total

no.of workers* 100

Labour productivity

Output per worker

=Total value of Output

Total Number of workers

• Look at labour productivity over a period of time e.g. 1 year

Cost per unit

= Total Labour Cost

Number of units produced

THANK YOU