ME T H O D S O F

LA B O U R C O S T I N G
BY ANIRBAN GUHA
G EM ENT A N D AC C O U NT I NG
SUB- MANA
C OD E - B CA ( B BA )N - 5 0 1
SUB
CONTENTS
 WHAT IS LABOUR COST?
 VARIOUS METHOD OF WAGE PAYMENT
 LABOUR TURNOVER
 CAUSES
 MEASUREMENT OF LABOUR TURNOVER
WHAT IS LABOUR COST?
The cost of labor is the sum of all wages paid to employees, as well as the cost of employee
benefits and payroll taxes paid by an employer. The cost of labor is broken into direct and indirect
(overhead) costs. Direct costs include wages for the employees that produce a product, including
workers on an assembly line, while indirect costs are associated with support labor, such as
employees who maintain factory equipment..
 VARIOUS METHOD OF WAGE PAYMENT
TIME RATE SYSTEM:
Time rate system is the simplest and oldest method of wage payment. According to this system, the workers
are paid in accordance with the time spent on the job. The time may be on hourly, daily, weekly, fortnightly
or monthly basis. The work or production done by an employee is not taken into consideration.
For example,
If the worker is paid at the rate of rs.20 per hour and he spends 50 hours during a week, the weekly
payment is:
Weekly wages = (number of hours worked during the week) x (rate per hours) = 50 x 20 = rs.1000 per week.
Advantages of time rate system

This method of wage payment is very simple. The workers will not find any difficulty in calculating the
wages.

This method is acceptable to trade unions because it does not distinguish between workers on the basis of
their performance.

The quality of goods will be better as workers are assured of wages on time basis.
This system is good for the beginners because they may not be able to reach a particular level of
production in the beginning.

There will be less wastage, as workers will not be in a hurry to push through production.
 PIECE RATE SYSTEM

Piece rate system is a system in which wages are paid in accordance with the number of units of
work produced. This is independent of time spent on the job. A fixed rate of wage is paid for each
piece of unit produced.

For example,
If a worker produces 100 pieces per day and he is paid at the rate of rs.1.2 per piece, the daily
wage is 100 x 1.2 = rs.120.
 Advantages

• This system is simple in working and the workers can easily calculate their wages.
• This system helps in distinguishing efficient and inefficient workers.
• Strict supervision is not required in this system.
• This system is fair to employee and employer both.
• There will be no dispute for wages, as workers will be rewarded satisfactory for their work.
 COMBINATION OF TIME AND PIECE RATE SYSTEM:
In this system, both time and product are taken into consideration. The minimum weekly wages are fixed for
every worker, which are to be paid irrespective of his output during the week, provided he has worked for
full working hours required in a week. The wages for the period of his absence are deducted from the total
amount of his wages.
The piece rate system is also combined with time rate system as follows:
A job card of each worker is maintained which clearly shows the number of jobs completed by the worker
during a week. Payment for each job is fixed in advance. If the piece rate wages earned by the worker are
more than time rate wages, the balance is paid to the worker. On the other hand, if piece rate wages are less
than time rate wages, then the worker will have to compensate the same by making more pieces during next
week.
 Advantages:

• This system provides incentives to workers to produce more,

• It is simple in its working and the workers can easily calculate their wages.
 LABOUR TURNOVER
Labour turnover refers to the rate at which employees leave employment. Labour turnover can be evaluated by relating the
number of employees leaving their employment during a period of time to the total or average numbers employed in that period.
EXAMPLE:
LET US ASSUME THAT IN A FACTORY THERE WERE 2,000 EMPLOYEES ON AN AVERAGE DURING THE YEAR
2018 AND 100 PERSONS LEFT THE COMPANY DURING THIS PERIOD. SO, THE LABOUR TURNOVER WILL BE 
100*100/2000 = 5%

GENERALLY, IT IS MEASURED BY THE FOLLOWING FORMULA:

NO. OF EMPLOYEES LEAVING DURING THE PERIOD

AVERAGE NUMBER OF EMPLOYEES EMPLOYED DURING PERIOD
 CAUSES
AVOIDABLE CAUSES ARE:

lower wages;
bad working conditions;
unsympathetic attitude of the management;
lack of opportunities for promotion;
lack of proper training;
improper manpower planning;
lack of proper incentives;
bitter relationship between management and workers;
lack of conveyance, accommodation, medical and educational facilities;
 UNAVOIDABLE CAUSES:
Sometimes workers have to leave the organisation because of management requirements and administrative actions.
They also leave their employment at their own will, that is, on personal reasons. In the latter case the management
can do nothing but remains a helpless onlooker. So, unavoidable causes may be administrative or personal.
(1) administrative causes:

termination of service due to indiscipline, insubordination, bad conduct etc.

retrenchment or lay-off due to shortage of resources, low demand for recession.
(2) personal causes:

change for better job;

death;
retirement due to old age;
change for better working conditions, better environment;
 MEASUREMENT OF LABOUR TURNOVER
LABOUR TURNOVER RATE CAN BE MEASURED BY THE APPLICATION OF ANY ONE OF THE FOLLOWING THREE METHODS:

1. SEPARATION METHOD:
NO. OF SEPARATIONS DURING THE PERIOD X 100
AVG. NO. OF WORKERS IN PERIOD

(II) REPLACEMENT METHOD:

NO. OF WORKERS REPLACED DURING THE PERIOD X 100
AVG. NO. OF WORKERS IN PERIOD

(III) FLUX METHOD:

NO. OF SEPARATIONS + NO. OF REPLACEMENTS X 100
AVG. NO. OF WORKERS IN PERIOD
THA NK Y OU