LABOUR

LABOUR COST
Human efforts used for conversion of materials into finished products or doing
various jobs in the business are known as labour.
Payment made towards the labour is called labour cost. Labour cost is the
significant element of the total cost of production.
Labour Cost, representing the human contribution to production, is an important
cost factor which requires constant control, measurement and analysis.
TYPES OF LABOUR
LABOUR TURNOVER
Labour turnover denotes the percentage change in labour force of an organization.
High percentage of labour turnover denotes that labour is not stable.

Labour turnover ratio is calculated by the following formula :-

LTR Replaced worker x

= 100 Total no. Of workers
CAUSES OF LABOUR
TURNOVER

1.Personal 2.Unavoidable 3.Avoidabl

Cause Cause e Causes
• Death • Due to • Lack of job
• Ill health insubordination security
• Dislike for • Due to lack of • Lack of
the job attention to proper
• Marriage of women duty training
workers • Due to immoral facilities
• Retirement character • Lack of promotion
• Family problem • Due to opportunities
accidents • Lack of medical
facilities
COMPUTATION AND
TREATMENT OF LABOUR COST
The Labour Cost is the sum of all wages paid to employees, as well as the cost of employee
benefits and payroll taxes paid by an employer.
Consideration includes wages, salaries, contractual payments and benefits, as applicable, or
any payment made on behalf of the employee.
IDLE TIME
Idle time is a period of time in which an asset is ready and available, but is not doing anything. This
is why idle time is sometimes referred to as waiting time.
Types of Idle Time:
Based on causes or reasons for its occurrence, idle time can be divided into two categories i.e.:
(a) Normal Idle time.
(b) Abnormal Idle time.
Control of Idle Time:
The abnormal idle time can be controlled by effective planning. The reasons for idle time are to be
analysed and steps are to be taken to provide for all contingencies like preventive maintenance of
machinery, proper arrangement for providing sufficient materials, preparation of job instructions in
advance, avoidance of strikes, etc. Even normal idle time can be controlled by efficient
administrative planning and supervision.
NORMAL IDLE TIME
This is inherent in all kinds of employment and cannot be avoided. The cost of this time is borne by the respective jobs or
products or departments.
Examples of normal idle time:
(1) Time consumed by the workers to walk from gate to department.
(2) Time taken to pick up tools, change of dress and picking up instructions for work.
(3) Time consumed for changing from one job to another.
(4) Time taken for personal needs and tea break.
(5) Waiting time when the machine is made ready for production work, called setting up time.
Treatment of Normal Idle Time:
Normal idle time is unavoidable and its cost is charged to production.
There are two ways of charging normal idle time to production:
- Normal idle time cost is taken as factory expenses and recovered as indirect charge.
- The normal idle time cost is directly charged to production as direct wages.
ABNORMAL IDLE TIME
The abnormal idle time is avoidable idle time which occurs due to conditions which can be prevented.
The reasons for abnormal idle time are as follows:
(1) Time lost due to machine break down,
(2) Time lost due to power failure;
(3) Time lost on account of shortage of materials;
(4) Time wasted due to lack of instructions; and
(5) Time lost on account of strikes and lock outs.
Treatment of Abnormal Idle Time:
A basic principle of cost accounting is to eliminate the effect of all abnormal losses and gains on jobs
or processes or operations by transferring all abnormal costs and gains to profit and loss account.
They should not form part of the cost of production. Wages paid for abnormal idle time is charged to
Costing Profit and Loss Account.
OVERTIME
Employees are expected to work during a fixed schedule of hours of a day or a week. If they
work beyond-the hours the excess hours are called overtime hours. In other words, the work
performed beyond the normal hours is called overtime work.
The additional amount paid to workers on account of over time is called overtime premium.
Overtime is not to be encouraged as it increases cost of production because of the under
mentioned reasons:
(1) Overtime is paid at double the normal time rates.
(2) Overtime is done after normal hours which are late hours, when fatigue sets in and the
efficiency of workers may not be at the required level.
(3) In order to have sufficient work for overtime, the workers may not work to their potential
during normal time.
(4) Expenditure incidental to overtime like electricity, maintenance of plant, wear and tear and
supervision, etc., have to be additionally incurred.
OVERTIME (CONT.)
Treatment of Overtime:
The normal wages form part of direct labour cost whereas there is controversy regarding treatment of overtime
premiums. The work done during normal time has to bear single rate and work done during over time to cost
double which creates ‘inequity’. To do away with this, the normal wages are to be increased to include overtime
premiums so that the jobs either during normal time or during overtime will bear the same cost.
But if overtime is done on account of pressure from a specific customer, the over-time premium is charged to that
customer. If the overtime is due to abnormal reasons like machine break down, power failure, the overtime
premium is charged to costing profit and loss account directly, as an abnormal cost.
Control of Overtime:
Since the overtime has many disadvantages it is to be avoided and controlled to the fullest extent.
The following measures are suggested:
(1) All usual work has to be completed in normal time to leave little scope for over-time work.
(2) The justification for over time should be backed up by substantial benefits and the over-time should be
sanctioned by a competent authority.
(3) The maximum limit of over time should be fixed for each worker.
(4) Frequent and periodical reports are to be prepared and forwarded to the management relating to hours of over-
time and its cost. This will enable the management to take corrective action.
REMUNERATION AND
INCENTIVES
ESSENTIALS OF A GOOD
WAGE SYSTEM
METHODS OF WAGE PAYMENT
1. TIME RATE SYSTEM
Payment made on the basis of time spent by the workers in the factory irrespective of
output produced.

Total Earning = Hours worked × Rate per hour

2. PIECE RATE SYSTEM

Payment made on the basis of production or work done irrespective of time taken by the
worker.

Total Earning = No. of Pieces × Rate per Piece

STRAIGHT & DIFFERENTIAL
PIECE RATE SYSTEM
In a piece rate system, the earnings of the workers depend on the number of units of output
produced and the wages rate per unit received by the worker.
There are two variations under piece rate system:
1. Straight Piece Rate System
Under straight piece rate system workers are paid according to the number of units produced
at a fixed rate per unit.
2. Differential Piece Rate System
This is an improvement over straight piece rate to increase the performance of both efficient
and inefficient workers. Two or more rates are offered to workers. Higher performance is paid
at a higher rate and lower performance is paid at lower piece rate.
Two major types of differential piece rate system were proposed by Taylor and Merrick
TAYLOR’S DIFFERENTIAL
PIECE RATE SYSTEM
This system was introduced by F. W. Taylor. The main features of this system are as
follows:
Day wages are not guaranteed, i.e. it does not assure any minimum amount of wages
to workers.
A standard time for each job is set very carefully after time and motion studies.
Two piece rates are set for each job- the lower rate and the higher rate.
–The lower piece rate is payable where a worker takes a longer time than the
standard time to complete the work.
–Higher rate is payable when a worker completes the work within the standard time.
MERRICK’S DIFFERENTIAL
PIECE RATE SYSTEM
It is a modification of Taylor’s differential piece-rate system in which three piece-rates are
used to distinguish between the beginners, the average workers, and the superior workers,
against two piece-rates in Taylor’s system.
The worker is paid the straight price rate up to 83% of the standard output,
10 % above the normal rate for producing between 83% – 100% and
20% above the normal rate for producing more than 100% of the standard output.
PREMIUM AND BONUS PLAN