1. Course: BBA
Semester: 2nd
Semester
Name of Subject: Cost Accounting
Subject Code: BBA 102
Unit-II
Faculty Name: Ms. Shivani Arora,
Assistant Professor
DR. AKHILESH DAS GUPTA INSTITUTE OF
PROFESSIONAL STUDIES
By Shivani Arora 1
2. Labour Cost
It is “the aggregate of all kinds of consideration paid, payable and provision made for future payments,
for the services rendered by employees of an enterprise (including temporary, part time and contract
employees). Consideration includes wages, salaries, contractual payments & benefits, as applicable, or
any payment made on behalf of the employee. This is also known as labour cost”.
Organization for Accounting and Control of Labour Cost
1. Personnel department
2. Engineering department
3. Time-keeping department
4. Payroll department
5. Cost accounting department
Labour Cost
Direct Labour Cost Indirect Labour Cost
3. Labour Turnover
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 thus defined as “the rate of change in the composition of the
labour force in an organisation”.
Measurement of Labour Turnover
1. Separation method
2. Replacement method
4. 3. Flux method
4. Labour Turnover due to New Recruitment
Total number of workers joining, including replacements, is called Accessions.
5. Equivalent Annual Labour Turnover Rate
5. Causes of Labour Turnover
Avoidable Causes
• Low wages & allowances
• Unhappy relations with
co-workers & supervisors
• Unsatisfactory working
conditions
• Trade union rivalry
• Lack of medical facilities,
transport facilities etc.
• Inadequate job security &
retirement benefits
Unavoidable Causes
• Death or retirement
• Illness or accident
• Domestic problems
• Discharge on discipline grounds
• Seasonal nature or business
• Change in plant location, job for
betterment
• Marriage
6. Cost of Labour Turnover
Preventive Cost
• Cost of personnel management
• Cost of welfare activities &
services
• Cost of medical services
• Pensions schemes
• Extra bonus & other perquisites
Replacement Cost
• Cost of recruitment & selection
of new employees
• Cost of training of new workers
• Loss of output due to some
time gap in recruiting new
workers
• Loss due to inefficiency of new
workers
• Cost of accidents due to lack of
experience
• Cost of extra scrap & defective
work of new workers
• Cost of tools & machine
breakdown
7. Frauds in the Payment of Wages – Types of Frauds
1. Inclusion in the payroll of fictitious or dummy workers, wrong hours of duty & overtime.
2. Showing absent workers as present.
3. Ignoring to mark late arrival or early departure.
4. Use of wrong rate of pay in the payroll.
5. Inclusion of bonus not due.
6. Intentionally failing to record deductions.
7. Manipulation in the payment of wages.
Prevention of Frauds
1. Each employee should be issued an identity card.
2. To detect dummy workers, names in the wages sheet should be compared with job cards & time
keeper’s records.
3. The wage sheet should be properly signed by all those persons responsible for its preparation.
4. Wages sheet of the previous months should be compared with that of current month.
5. Overtime should be properly authorized & no overtime payment should be made without proper sanction.
8. Casual Workers
The casual or badly workers are temporary workers who are not on the regular payroll of the
factory. They are appointed on a daily basis to meet additional workload or to stand in for
absentee workers.
Out-workers
These are the workers who work outside the factory premises on behalf of the undertaking. They
are classified into 2 categories as given below:
a. Workers who work from their own homes
b. Workers sent to site.
9. Idle Time
It 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 which they actually spend on
production is bound to arise. This difference is known as idle time.
Causes
1. Productive causes – result in loss of production.
Due to machine breakdown
Power failures
Waiting for tools &/or raw materials
Waiting for work
Waiting for instruction
2. Administrative causes – caused by administrative decisions.
3. Economic causes – caused by fall in the demand of products say due to serve competition, seasonal
nature of certain industries like woollen goods.
10. Overtime
Overtime is the amount of time someone works beyond normal working hours.
Advantages:
Increases productivity
Increases profitability
Benefits to the employees
Utilizes time and resources
Disadvantages:
Leads to excessive labour cost
Labour productivity is decreased because of diminishing labour efficiency
Puts an extra strain on plant & machinery
Overheads like lighting cost, increase because of work in the evening
11. Treatment of Overtime
Normal amount of wages,
salaries etc.
Charged to the cost
unit or production
order on which the
worker is working
Additional amount expended on overtime
work i.e., overtime premium.
When overtime is job specific
Due to general pressure
Due to abnormal reasons
12. Control of Overtime
The following steps should be taken :
1. All overtime work should be duly authorized by the works manager.
2. Overtime cost should be separately recorded for each department for proper planning in future.
3. Total overtime premium should be regularly reported to the works manager.
4. When overtime becomes a permanent feature, say, due to shortage of plant capacity, steps may be taken
to install additional plant & machinery or introduce an additional shift to cope with additional work.
Treatment of Special Items
Leave with Pay Holiday with Pay Profit sharing Bonus
13. Methods of Labour Remuneration
1. Time Rate System
2. Piece Rate System
Incentive Plans
1. Halsey Premium Plan
• Combination of time & piece rate systems.
• If worker takes standard time is more than the standard time to complete his work, he is paid wages
for the actual time.
• If worker takes less than the standard time to complete his work, he is paid a bonus equal to 50% of
the time saved at the time rate fixed.
14. 2. Halsey Weir Plan – this method is same as Halsey Plan except that in Halsey Weir Plan the bonus is
equal to 30% of the time saved.
3. Rowan Plan
Basis Halsey Plan Rowan Plan
Bonus When time saved increases, bonus
also keeps on increasing.
When time saved increases, bonus
increases only when time saved is up to
50% of the standard time or time
allowed.
Earnings per hour When time saved is less than 50% of
time allowed, the rate of increase in
per hour earnings is higher.
When time saved is more than 50% of
time allowed, the rate of increase in per
hour earnings is higher.
Effect on Labour
cost
Labour cost per unit decreases as
production increases to the standard.
The cost per unit under this plan is higher
until time saved is 50% of time allowed.
15. 4. Taylor’s Differential Piece Rate System (Introduced by F W Taylor, the father of scientific
management)
• 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 & motion studies.
• Two piece rates are set for each job – the lower and 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.
5. Merrick’s Differential Piece Rate System (Multiple Piece Rate System)
16. 6. Gantt’s Task & Bonus Plan
• Day wages on time basis are guaranteed to all workers.
• This plan is a combination of time rate, differential piece rate & bonus.
• A standard is set & remuneration is calculated as follows:
1. When output is below standard – payment at time rate.
2. When output is at standard – payment at time rate plus 20% bonus.
3. When output is above standard – payment at high piece rate.
7. Emerson’s Efficiency Plan
8. Bedaux Plan
In this plan, the standard time for each job is determined in minutes known as Bedaux points or B’s. One B unit
represents the amount of work which an average worker can do under ordinary conditions in one minute. The
standard time is determined by work study & each job is assigned a number of B’s.
17. GROUP BONUS PLANS
Incentive Plans for Indirect Workers
Co-Partnership & Profit Sharing Non-Monetary Incentives
