LABOUR CONTROL

Ashim Bhatta ( CA, MBS, ISA)

 What is labour cost ??
Employee (Labour) cost: Benefits paid or payable to the employees of an
entity, whether permanent, or temporary for the services rendered by them.
Employee cost includes payments made in cash or kind.
Employee cost includes the following:
(i) Wages and salary;
(ii) Allowances and incentives;
(iii) Payment for overtimes;
(iv) Employer’s contribution to Provident fund and other welfare funds;
(v) Other benefits (leave with pay, free or subsidised food, leave travel
concession etc.) etc

The aim should be to keep the wages per unit of output as low as
possible
 Illustration - labour cost
Compute the employee cost from the following particulars:

Basic pay Rs.3,00,000. Accommodation provided to employees free of cost (this

accommodation is owned by the employer, depreciation of the accommodation is
Rs.50,000. Maintenance charges Rs.40,000 and municipal tax of the accommodation
Rs.2,000.

Employer's contribution to PF Rs.60,000. Due to delay in making payment, a penalty

was imposed for Rs.3,000, which was paid by the employer. Reimbursement of
medical expenses Rs.40,000.

Employees contribution to PF Rs.60,000.

Bonus paid to employees RS.1,00,000.

Hospitalisation expenses of Employee's family Rs.1,00,000 paid by employer

 Illustration - labour cost
Computation of Employee Cost:
Particulars Amount (Rs.)

Basic pay 3,00,000

Add: Cost of accommodation provided by employer
= Depreciation + Maintenance Charges & Municipal Tax
= 50,000 + 40,000 + 2,000 = 92,000 92,000
Add: Employer’s contribution to PF 60,000
Add: Reimbursement of medical expenses 40,000
Add: Hospitalization expenses 1,00,000
Add: Bonus paid to employee 1,00,000
Total Employee Cost 6,92,000
Important Factors for the Control of Employee Cost

(i) Assessment of manpower requirements.

(ii) Control over time-keeping and time-booking.
(iii) Time & Motion Study.
(iv) Control over idle time and overtime.
(v) Control over employee turnover.
(vi) Wage and Incentive systems.
(vii) Job Evaluation and Merit Rating.
(viii) Employee productivity.
 Job evaluation and Merit rating
Job evaluation is the assessment of the relative worth of jobs within
a company and merits rating are the assessment of the relative worth
of the man behind the job.

Job evaluation and its accomplishment are means to set up a

rational wage and salary structure where as merits rating provides a
scientific basis for determining fair wages for each worker based on
his ability and performance.

Job evaluation simplifies wage administration by bringing an

uniformity in wage rates where as merits rating is used to determine
fair rate of pay for different workers
 IDLE TIME
Idle time refers to the labour time paid for but not utilized on production.
It, in fact, represents the time for which wages are paid, but during which
no output is given out by the workers. This is the period during which
workers remain idle.
Treatment in Cost Accounting:
Normal idle time: It is inherent in any job situation and thus it cannot be
eliminated or reduced. For example:- time gap between the finishing of
one job and the starting of another; time lost due to fatigue etc.
The cost of normal idle time should be charged to the cost of production.
This may be done by inflating the labour rate. It may be transferred to
factory overheads for absorption, by adopting a factory overhead
absorption rate.
Abnormal idle time: It is defined as the idle time which arises on
account of abnormal causes; e.g. strikes; lockouts; floods; major
breakdown of machinery; fire etc. Such an idle time is uncontrollable. The
cost of abnormal idle time due to any reason should be charged to Costing
Profit & Loss Account.
Illustration - IDLE TIME
 Overtime
Payment to workers, when a worker works beyond the normal working
hours. Usually overtime has to be paid at double the rate of normal hours.
Overtime Premium: It’s the amount of extra payment paid to a worker
under overtime

Under Cost Accounting, the overtime premium is treated as follows:

If overtime is resorted to at the desire of the customer, then the overtime
premium may be charged to the job directly.
If overtime is required to cope with general production programme or
for meeting urgent orders, the overtime premium should be treated as
overhead cost of particular department or cost center which works
overtime.
Overtime worked on account of abnormal conditions should be charged
to costing Profit & Loss Account.
If overtime is regular overtime premium is used to inflate the normal
wage rate.
Illustration - Overtime
Illustration - Overtime
Illustration – Normal & Abnormal Idle time
Illustration – Normal & Abnormal Idle time
 LABOUR TURNOVER
It is defined as an index denoting change in the labour force for an organization during
a specified period. Labour turnover in excess of normal rate is termed as high and
below it as low turnover.
Definitions of labour turnover are as follows:
Labour Turnover according to Separation method
Labour Turnover according to Flux Method
Labour Turnover according to Replacement Method
Two types of costs which are associated with labour turnover are:

Preventive costs: This includes costs incurred to keep the labour turnover at a low
level i.e., cost of medical schemes. If a company incurs high preventive costs, the rate
of labour turnover is usually low.

Replacement costs: These are the costs which arise due to high labour turnover. If
men leave soon after they acquire the necessary training and experience of work,
additional costs will have to be incurred on new workers, i.e., cost of advertising,
recruitment, selection, training and induction, extra cost also incurred due to abnormal
breakage of tools and machines, defectives, low output, accidents etc., caused due to
the inefficiency and inexperienced new workers.
LABOUR TURNOVER
LABOUR TURNOVER
Illustration – Labour Turnover
 Illustration – Labour Turnover
Your organization is experiencing a high labor turnover in recent years, and
management would like you to submit a report on the loss suffered by the company
due to such labor turnover. Following figures are available for your consideration.

Sales: Rs.600 lakhs

Direct materials: Rs.150 lakhs
Direct labor: Rs.48 lakhs on 4,80,000 man hours
Other variable expenses: Rs.60 lakhs
Fixed overheads: Rs.80 lakhs

The direct man hours include 9000 man hours spent on trainees and replacements,
only 50% of which were productive. Further, during the year 12,000 man-hours of
potential work could not be availed of because of delayed replacement. The cost
incurred due to separation and replacements amounted to Rs.1 lakh.

On the basis of the above data, prepare a comparative statement showing actual
profit vis-à-vis the profit which would have been realized had there been no labor
turnover.
Working Note
Incentive system
Wage Calculation Methods
 Wage Calculation Methods

Combination of time & Piece

Gantt Task Bonus Plan

Production below standard - Guaranteed time rate
Production at standard – 120% of time rate
Production above standard - 120% of piece rate
Wage Calculation Methods
Wage Calculation Methods
Illustration – BARTH PLAN
Illustration – Rowan & Halsey Plan
Illustration – Rowan & Halsey Plan
Illustration – Rowan & Halsey Plan
Illustration
Illustration
Illustration
Illustration
 Illustration

A company uses an old method of machining a part manufactured for sale. The estimates of
operating details for the year 2005-06 are given below.
Number of parts to be manufactured and sold: 30, 000
Raw materials required per part: 10 kg @ Rs.2 per kg
Average wage rate per worker: Rs.40 per day of 8 hours
Average labor efficiency: 60%
Standard time required to manufacture one part: 2 hours
Overhead rate: Rs.10 per clock hour
Material handling expenses: 2% of the value of raw material.
The company has a suggestion box scheme and an award equivalent to three months saving in
labor cost is passed on to the employee whose suggestion is accepted. In response to this
scheme suggestion has been received from an employee to use a special Jig in the manufacture
of the aforesaid part. The cost of the Jig, which has life of one year is Rs.3, 000 and the use of
the Jig will reduce the standard time by 12 minutes.
Required: [a] Compute the amount of award payable to the employee who has given the
suggestion. [b] Prepare a statement showing the annual cost of production before and after the
implementation of the suggestion to use the Jig and indicate the annual saving. [c] State the
assumptions on which your calculations are based.
Solution
Solution