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Labour cost

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Labour cost

  1. 1. Labour Cost
  2. 2. 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. It can also be direct and indirect.
  3. 3. Direct Labour: Direct labour is all labour expended and directly involved in altering the condition, composition or construction of the product. The wages paid to skilled and unskilled workers for manual work or mechanical work for operating machinery, which can be specifically allocated to a particular unit of production, is known as direct wages or direct labour cost. Hence, 'direct wage' may be defined as the measure of direct labour in terms of money. It is specifically and conveniently traceable to the specific products Wages paid to the goldsmith for making gold ornament is an example of direct labour.
  4. 4. Example of direct labour • Machine operator • Shoe-maker • Carpenter • Weaver • tailor
  5. 5. INDIRECT LABOUR • Indirect Labour: Labour employed to perform work incidental to production of goods or those engaged for office work, selling and distribution activities are known as 'indirect labour'. The wages paid to such workers are known as 'indirect wages' or indirect labour cost. • Example: Salary paid to the driver of the delivery van used for distribution of the product.
  6. 6. Example of indirect labour • Supervisor • Inspector • Cleaner • Clerk • Peon • watchman
  7. 7. Organisation for accounting and control of labour cost There are mainly five departments in an organisation which deal with labour . These are as follows: Personnel department Engineering department Time-keeping department Payroll department cost accounting department
  8. 8. Labour Turnover  In all business organisation , it is a common feature that some workers leave the employment and new workers join in place of those leaving .this change in work force is known as labour turnover . Labour turnover is this thus defined as ‘the rate of change in the composition of the labour force in an organisation.’ Labour turnover varies greatly between different trades and industries .for eg, where part-time and seasonal labour is employed ,the rate will be higher.
  9. 9. Measurement of labour Turnover  To facilitate comparisons between different periods and different undertakings , labour turnover may be expressed in rate .  There are three alternative methods by which this rate is computed .once a particular method is used ,it should be consistently followed for comparative analysis.  The methods are: 1-separation method:
  10. 10. Measurement of L T  2-Replacement method  3- Flux method  Separation method:This method takes in to account only those workers who have left during a particular period .its formula is:  LABOUR TURNOVER RATE= NO.OF WORKERS LEFT DURING A PERIOD X100 AVERAGE NO. OF WORKERS DURING THE PERIOD
  11. 11. SEPRATION METHOD  AVERAGE NO. OF WORKERS= NO.OF WORKERS IN THE BEGINNING. + NO.OF WORKER AT THE END 2  MULTIPLICATION BY 100 IN THE ABOVE FORMULA INDICATES RATE IN PERCENTAGE.
  12. 12. REPLACEMENT METHOD  This method takes into account only those new workers who have joined in place of those who have left. Its formula is:  Labour turn over = No. of workers replaced during the period x100 Average no. of workers during the period  If new workers are engaged for expansion program or any other such purpose, they are not considered for this computation.
  13. 13. FLUX METHOD  This shows the total change in the composition of labour force due to separations and additions of workers .its formula is:  Labour turnover rate = No. of workers left + no. of workers replaced x 100 Average no. of workers
  14. 14. PRACTICAL PROBLEM From the following data given by the personnel department. calculate the labour turn over rate by applying: (a) Separation method (b) Replacement method, and (c) Flux method No. of workers on the payroll: At the beginning of the month 900 At the end of the month 1100
  15. 15. Practical During the month 10 workers left, 40 persons were discharged and 150 workers were recruited .Of these , 25 workers are recruited in the vacancies of those leaving while the rest were engaged for an expansion scheme.
  16. 16. Casual worker  The casual or ‘badli’ workers are temporary workers who are not in the regular payroll of the factory .they are appointed on daily basis to meet additional work load or to stand in for absentee workers. The appointment of casual workers is a very common source of fraud in the payment of wages .it is, therefore, very important to have control over there appointments, their time of work and their payment of wages.
  17. 17. Steps should be taken for accounting and control of casual workers  A)Full control regarding appointment and discharge of such workers should be maintain.  B) The appointment of such workers should be sanctioned by a competent executive.  C)Payment of wages should be made by a person other than one who appointed them .  D)When they are appointed as indirect Workers ,Time sheets should be issued to them.
  18. 18. STEPS  E) when casual worker are employed at site for some contract work ,surprise visits should be paid to check their number.
  19. 19. OUT- WORKERS  These are the workers who work out side the factory premises on behalf of the under taking known as out- workers. out-workers are classified in to two categories as given below:  A)Worker who work from their homes: they are supplied with raw materials and thy work either with their own tools or tools supplied by the concern .such worker are usually paid on piece basis .
  20. 20. CONTROL OVER SUCH WORKER SHOULD BE EXERCISD IN THE FOLLOWING MANNER  1)All materials supplied should be accounted for and there should be no undue wear and tear of tools supplied by the concern.  2) The work should be delivered within the stipulated time.  3)The quality of finished work should be carefully inspected.
  21. 21. (B)Workers sent to site  Some workers may be sent to site or customers premises for performing work. For example- some companies supplying engineering products provide after sales service and workers sent to customers place when so required. such out workers may while away their time when they go out for work .job cards should be issued to them so that labour cost of work done can be ascertained.
  22. 22. Idle Time  Idle time represents time lost by workers who are paid on time basis .when workers are paid on time basis , some difference between the time for which they are paid and that they actually spend on production is bound to arise. this difference is known as idle time. idle time represents the time for which they are paid but no production is obtained . For example : time lost between factory gate and department, time when production is interrupted by machine maintenance ,tea breaks etc.
  23. 23. Causes idle time may occur owing to productive, administrative or economic causes  1-Productive causes: The productive causes are those which result in loss of production. These include:  (a)idle time due to machine break down.  (b)power failures.  (c)waiting for tools and /or raw materials.  (d) waiting for work  (e)waiting for instructions  Idle time due to productive causes is usually controllable by proper planning, strict supervision and proper maintenance of plant and machinery.
  24. 24. 2-Administrative causes  Idle time is sometimes caused by administrative decisions .This usually happens during depressions when some of machines have got to work below normal capacity and regular workers paid full amount of wages . This is because the management does not want to discharge trained workers temporarily. Such abnormal idle time arises out of abnormal situation and is generally not controllable.
  25. 25. 3-Economic causes  Idle time may also be caused by fall in the demand of products , say due to sever competition ,seasonal nature of certain industries like woolen goods, ice-cream ,etc. where production can not be evenly distributed throughout the year. In such cases it is not possible to get rid of workers during slack season. Such surplus labour force is utilised for doing some other jobs and if such complementary jobs can not be found ,there will be some idle time which is beyond control.
  26. 26. Treatment of idle time  From the point of view of treatment in cost accounts ,idle time may be classified as normal and abnormal .  Normal idle time :This is that waste of time which we can not stop because it is normal and employer has to pay laborers for this idle time. For example : a) Walking time from one department to other department. b) Consuming time to start any job in factory. c) Consuming time for fulfilling personal needs like drinking of water, refreshment and rest. d) Consuming time to set the machines.
  27. 27. Treatment of the Cost of Normal Idle Time  1)-As overhead-It must be charged as indirect expenses in factory. For example, if a laborer gets Rs. 1 per hr and he spend 8 hrs in factory and his total wage will be Rs. 8 but he utilized his productive time 7 hrs, then direct labor cost will be 8 hrs X Rs. 1 = Rs. 8 and 1hr will be overhead of idle time and Rs. 1 per hr idle time will be written in factory expenses in cost sheet.
  28. 28. 2)-As direct wages  We can also increase the cost of labor rate. with following way If a labor works for 8 hrs, he gets = Rs. 1 per hr If a labor works for 7 hrs, he gets = Rs. 1 / 8 X 7  = Rs. 1.14 per hr Now labor cost will increase by 0.14 paise
  29. 29. Abnormal Idle Time  This is that wastage of time which we can stop by good supervision. a) waste of time due to inefficiency of engineers. b) Power failure c) Delay of supply of material to factory d) Strike and lockout
  30. 30. Treatment of the cost of Abnormal Idle Time  Wage for abnormal idle time is loss of business and it must be transferred to costing profit and loss account.
  31. 31. Over time  Over time occurs when a worker works beyond the normal working hours. The normal working hours are laid down in the factories act. Acordingly,any worker working for more than 9 hours per day or more or more than 48 hours per week is entitled to over time payment..The factories act also provides for payment of overtime wages at double the normal rates of wages .the overtime work therefore, a costly affair and should be avoided as far as possible .
  32. 32. Leave with pay  According to the factories act , workers are entitled to annual leave with full pay for a specified number of days in a year. This may include casual leave , medical leave ,special leave etc. The cost of paid leave can not be charged to any work order or cost unit since no work is done during this period .it is there fore ,treated as indirect labour cost and charged to over head.
  33. 33. Leave with pay  Alternatively, leave wages may be treated as direct labour cost in which case the wage rate is inflated. This is done by estimating in advance the amount of leave wages and spreading it over the actual no. of working hours to give an inflated hourly rate.
  34. 34. Holiday with pay  Workers are also entitled to certain holidays like diwali,id, Republic day, independence day etc. Like leave wages, payment of these wages of holiday is also unproductive in the sense that no production work is done on these days. Payment for such holidays should there fore be treated in the same way as leave wages.
  35. 35. Worker's Remuneration:  The remuneration for labour is wages. The workers put effort & get wages in exchange of that. On the basis of pay scale & other allowances which are prescribed in the terms of employment, calculation of wages paid to direct or indirect workers is done. By terms of agreement between the employees & the employer, this may be modified from time to time. On the basis of job evaluation, merit rating, incentive plans, profit sharing & labour contract, the wages for the workers are determined.
  36. 36. Features essential for a successful wage plan: A successful wage plan should have the under mentioned essential features: Fairness: A wage plan which is based on scientific time & motion study becomes fair to both employer & employee. Minimum Wage guarantee: Minimum wage guarantee must be given to the workers, whether under legal compulsion or not. This minimum wage must be fairly above subsistence level of income. Link between effort & remuneration: Unless there is a link between the value of work done & the remuneration payable, there will be unfair to either the employer or the worker. Satisfaction for the workers: The worker must be satisfied by the wage plan which will result in high morale & low labour turnover.
  37. 37. Work guarantee: If there is payment by result, worker's earnings will not be satisfactory, even if the rate is too high, unless continuous work is there, which is available to them. Conformity with legal provisions & trade agreements: The wage plan should always be in accordance with any of the provisions of law relating to the payment of wage & also there should not be any violation of trade agreement. Flexibility: The wage plan must be flexible & not rigid. In case of change in situations, incorporation of some change may have to be there in the wage plan also. Unlike rigid plan, modification can be made in the flexible plan without much disturbance. Cost of implementation: The wage plan cost of implementation must be as low as possible
  38. 38. LABOUR COST Methods of Remuneration (systems of wage payment) There are two basic methods of labour remuneration: (a) Time Rate System; and (b) Piece Rate System Time Rate System Under the time rate system, workers are paid according to the time for which they work. Payment may be on hourly basis, daily basis or monthly basis. In this system, no consideration is given to the quantity or quality of work done. When payment is made on hourly basis, total wages payable are calculated as follows: Wages = No. of hours worked x Rate per hour Piece Rate System Wages under this system are paid according to the quantity of work done. A rate is fixed per unit of production and wages are calculated by the following formula: Wages = Rate per unit x No. of units produced.
  39. 39. Various Incentive Plans Straight Piece Rate Method The method rewards employees based on their output. A fixed rate of wage is paid for each unit produced, or number of operations completed or job completed. The wages payable is calculated by multiplying the number of pieces produced by the wage rate. There is generally a guaranteed hourly rate for workers who are unable to attain the standard in order to pay the minimum ‘day wages’. Flat Time Rate Method This method is used for paying remuneration to employees based on their attendance. A fixed rate of wage is paid hourly, or daily, or weekly on the basis of time spent on the shop floor (i.e. production department) in production. The wages payable is calculated by multiplying the hours/days spent in production by the hourly/daily wage rate.
  40. 40. •Halsey Premium Bonus Plan (Halsey Plan and Halsey-Weir Plan) This plan was introduced by F A Halsey in 1891. It is a simple combination of time and piece rate systems. A worker is paid a guaranteed base rate and is rewarded when his performance exceeds standard. A standard time is established in respect of each job or unit. Bonus is paid on the basis of 50% of time saved. The total wages payable is calculated as under: = (Hourly rate X Time taken) + (50% X Time saved X Hourly rate) As a result of increased productivity, conversion cost per unit falls. This is because fixed overhead gets distributed over larger volume of output. Thus, the firm finds it possible to reward workers directly in proportion to production. In the case of Halsey Weir plan, the percentage used is 30 instead of 50.
  41. 41. Rowan Premium Bonus Plan (Variable Sharing plan) A standard time is established in respect of each job or process. There is a guaranteed base rate. A bonus is paid on the basis of time saved computed as a proportion of the time taken which the time saved bears to the standard time. The total wages payable is calculated as under: = (hourly rate x time taken) + ( time saved x time taken) x hourly rate time allowed
  42. 42. Taylor Differential Piece Rate Method This system was introduced by F. W. Taylor, the father of Scientific Management. The main features of this incentive plan are as follows: 1)Day wages are not guaranteed, i.e. it does not assure any minimum amount of wages to workers. 2)A standard time for each job is set very carefully after time and motion studies. 3)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. In other words, lower piece rate is payable to inefficient workers and higher piece rate is payable to efficient workers. It will be seen that there is a great difference between the wages of an efficient and an inefficient worker.
  43. 43. Problem 1 You are presented with the following information by Olympia Engineering Company related to the first week of December 1999. The firm employs 5 workers at an early rate of 2. During the week, they worked for 4 days for a total period of 40 hours each and completed a job for which the standard time was 48 hours for each worker. Calculate the labour cost under the Halsey method and Rowan method of incentive plan payments.
  44. 44. Solution of Problem # 1 Hasley Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate) = (10 x 40) + (0.5 x 8 x 10) = 440 Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate Time Allowed = (10 x 40) + (8 x 40) x 10 48 = 467
  45. 45. Problem 2 A worker is allowed 10 hours to complete a job on daily wages. He takes 6 hours to complete the job under a scheme of payment by results. His day rate is Rs. 6 per hour and piece rate is Rs. 36. The material cost of the product is Rs.40 and the overheads are charged at 150% of the total direct wages. Calculate the factory cost of the product under i) Piece work plan ii) Rowan Plan iii) Halsey plan
  46. 46. Solution of Problem # 2 Price Rate System = Rate per Unit x No. of Units produced = 6 x 6 = 36 Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate Time Allowed = (6 x 6) + (4 x 6) x 6 10 = 50.40 Hasley Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate) = (6 x 6) + (0.5 x 4 x 6) = 48
  47. 47. Problem 3 From the following particulars calculate wages earned by workers A and B respectively under Taylors System: Standard time allowed 10 units per hour Normal wage rate Rs. 1 per hour Differential rates to be applied: 90% of piece rate when below standard efficiency 125% of piece rate when at or above standard production on a day of 8 hours A – 75 units B -85 units
  48. 48. Solution of Problem # 3 Unit rate= 1/10 =0.1 Rs/ unit Below efficiency Rate = 0.10 = 0.10*0.9 = 0.09 Rs/unit. Above efficiency Rate = 0.10 = 0.10*1.25 = 0.125 Rs/unit. Worker A:- Produced unit = 75 Therefore, wage= 75*0.090 = 6.75Rs (ANS) Worker B:- Produced Unit = 85 Therefore, wage= 85*0.125 = 10.625 ~ 10.63Rs (ANS)
  49. 49. THANK YOU

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