Labor Cost

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Labor Cost Powered By Docstoc
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7.Darpan Batra 21.Rikita Gujral 23.Sonika Gupta 38.Devang Mehta 39.Anand Menon 41.Upasana Nagpal

′lā·bər ′köst
• 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

C L A S S I F I C A T I O N

Labour Costs



That portion of wages or salaries which can be identified & charged to a single costing unit

Cannot be correlated with production of specific goods, applicable to mfg activities generally (paid to foreman,stockkeeper,clerical staff)

Other Benefits


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

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

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: Hrs worked X Rate per Hr
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

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: Units Produced X Rate per Unit
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

Avg Labour cost/manday worked (state wise)2003-04

Chandigarh : Rs.592.16

Jharkhand: Rs 567.99

Manipur : Rs.77.69

Labour costs ( industry wise) 2003-2004

• Manufacture of refined petroleum products
• Manufacture of motor vehicle • Agriculture and animal husbandry activities



Advantage India

Calculations of wages for costing purpose
• Sum on pg 167…

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 Quality of goods gets affected due to improper labor control

Controlling accomplished by:
Personnel department Rate or time & motion study Production planning – job analysis


Time - keeping

Cost accounting department

Payroll department

• • • • • • 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

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

• Sum on overtime---pg 166..

Bonus and premium schemes
• To increase the production and productivity • To raise the morale • To retain the services of good workers • To establish better labormanagement 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. 2. 3. 4. 5. 6. 7. 8. Halsey premium plan Halsey- weir premium system Rowan plan Bedaux point premium system Taylor’s differential piece rate system Merrick differential piece rate system Gantt task & bonus plan Emerson efficiency system

Merrick Differential Piece Rate System
• Has 3 categories for payment • Daily wages are not guaranteed. Up to 83% Up to 100%

Price rate applicable
Normal rate 10% above Normal rate

Above 100%

20% above Normal rate



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

Time taken* rate + std time – time taken* time taken* rate Std time


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The worker is paid a % of The bonus hours are calculated as time saved over the the proportion of the time taken standard rate per piece. which the time saved bears to the Standard time is fixed for standard time allowed. each job/operation If the labour completes at standard time or more he is given the standard price.

• Pg 203 : sum no 14. • which covers grp cost, hasley and rowan plan.

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

Preventive costs Labour turnover ( High / Low )

Costs incurred to keep turnover as low as possible Costs due to replacement of employees

Replacement costs

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

• 1 sum on labor turnover------ pg 146…

Labour Productivity

Labour productivity
Output per worker Cost per unit

=Total value of Output Total Number of workers
• Look at labour productivity over a period of time e.g. 1 year

= Total Labour Cost Number of units produced

Labour Absenteeism

• Defined as the number of staff who miss work as a proportion of the total number of staff
Number of staff absent per time period
Look at absenteeism over a period of time e.g. 1 month

x 100

Total number of staff days worked per time period

Preparation of Pay Rolls or Wage Sheets
• Responsibility of The wages or payrolls department
Collection of basic data Calculation of wages payable Preparing an actual payroll

• •

Wages are calculated from any of the previous methods. The wage sheets are prepared department-wise as they help in budgeting

Cost accounting dept

Cost Analysis sheet

Wages abstract

Wages analysis

• •

Prepared either fortnightly or monthly. Main purpose is to classify the labor cost into direct or indirect and for each job or cost center.



Description: This ppt contains the basics of labor cost and few solved numericals applying the concept