Labour Cost

Labour Cost: Accounting and Control

07/09/09

Chandrakant@SOM,KIIT University

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Why Control? • Cost accounting for labour has three primary objectives: – Determining labour costs in the cost of product or service – Reporting labour costs for planning and control – Reporting labour costs for decision making

07/09/09

Chandrakant@SOM,KIIT University

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Basic Terms • Direct Labour Costs: Includes the costs incurred on wages which can be identified with and allocated to cost objects. Examples: all employees engaged in converting the raw materials into some form of finished output like workers, moulders, operators, samplers and finishers, etc. • Indirect Labour Costs: Which can not be allocated but which can be assigned or apportioned to cost centers or cost objects. Examples: employees not engaged in converting the raw materials into finished goods like foremen, inspectors, watchmen, supervisors, factory clerks, store keepers 07/09/09

Chandrakant@SOM,KIIT University

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Organisation for Labour Control • The following departments/functions contribute to effective utilization of labour and adequate control over labour costs: – Personnel Dept. – Engineering Dept. – Time-keeping Dept. – Payroll Dept. – Cost Accounting Dept. 07/09/09

Chandrakant@SOM,KIIT University

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Wage Systems • A well defined wage system should be designed to ensure exercising control and managing the labour cost. The following objectives should be considered before designing wage system: – Acceptance by employees to avert slowdowns and work stoppages – Provision for flexibility – Provision for economy in administration – Stabilization of labour turnover – Minimizing absenteeism 07/09/09

Chandrakant@SOM,KIIT University

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Kinds of Wage Systems • Straight Time: The worker is paid at an hourly,

daily or weekly rate and his remuneration depend upon the time for which he is employed and not upon his production. If someone works for overtime, he is paid at a higher rate. Found in industries where: – The speed of production can’t be influenced by the energy or dexterity of the worker – Quality of work is of paramount importance – Difficult to measure the work done by the employee

• Piece Work: A fixed rate is paid for each unit

produced, job performed or number of operations completed, and the worker’s wages thus depend upon his output and not upon the

07/09/09

Chandrakant@SOM,KIIT University

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Incentive Wage Plans • Objective: To induce a worker to produce more so that he can earn a higher wage and, at the same time, the unit costs can be reduced. • Incentive wage plans involve wage rates based upon various combinations of output and time and are known as “differential piece-rates” and “bonus plans” as well. Generally the following types are used: – Taylor Differential Piece-rate System – Merrick Differential Piece-rate System – Gantt Task Bonus Plan 07/09/09

Chandrakant@SOM,KIIT University

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Taylor Differential Piece-rate • In this system, the efficient workers are penalized by paying him low piece rate and rewarding the efficient worker by paying him a high piece rate for his higher production. Formula: (i) 80% of normal piece rate when below standard (low piece rate) and (ii) 120% of normal piece rate when at or above standard (high piece rate) • Concept Problem 4: Calculate the earnings of A and B. Standard production 8 units per hour, normal time rate Re 0.40 per hour. In a 9 hours a day, A produced 54 units and B produced 75 units. Apply Taylor’s Differential Piece Rate System. 07/09/09

Chandrakant@SOM,KIIT University

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Merrick Differential Piece-rate • In this method, three piece rates are used. Efficiency Piece Rate Up to 83 1/3 % Normal Piece Rate Between 83 1/3% - 100% 110% of Normal Above 100% 120% of Normal • Concept Problem 5: Calculate the 07/09/09

Chandrakant@SOM,KIIT University

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Gantt Task Bonus Plan • This system is a combination of both time and piece wage system. Standard time is set for a job or task and the worker’s efficiency is ascertained by comparing the actual performance with the standard set. – For Output below standard: Time Rate – For Output as standard: 120% of time rate – For Output above standard: 120% of 07/09/09

Chandrakant@SOM,KIIT University

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Premium Bonus Plans • Bonus plans have been devised to produce a trade-off i.e. any savings in cost are shared between employer and the employee. • The cost per unit decreases when production exceeds standard. • Bonus under different plans: – Halsey Premium Bonus Plan 50% * Time saved* Hourly rate – Rowan Premium Bonus Plan Time saved/Standard time * Time taken* 07/09/09

Chandrakant@SOM,KIIT University

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Work Study • Successful operation of incentive wage schemes depend on making a proper work study. It is a study of job, methods and equipment to ensure that the best way to do the job has been followed by a worker. Consists of two methods: • Method Study: Study and analysis of methods to improve the methods of production and to achieve most effective use of materials, manpower and plant. – Improved method has effectiveness, efficiency and operational simplicity – Unnecessary operations and activities are avoided – Proper follow up is necessary

• Work Measurement: Aims at determining the effective time required to perform the work. Different stages are; – Selection of the work – Measuring the actual time taken in the work done 07/09/09

Chandrakant@SOM,KIIT University

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Labour Turnover • It is the rate at which the employees leave employment at a factory and is normally measured as a %. • LT (%) = (All employees leaving/Avg. no. employed) * 100 • It is caused by many factors such as: – Avoidable causes – Unavoidable causes – Personal causes 07/09/09

Chandrakant@SOM,KIIT University

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Cost of Labour Turnover • Cost of labour turnover consists of the two elements: – Preventive cost • • • •

Personnel administration Medical and health care Welfare measures Retirement benefits

– Replacement cost • • • • 07/09/09

Personnel department expenses Cost of training new employees Inefficiency of new workers Cost of breakage of tools and equipments Chandrakant@SOM,KIIT University

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Measures to reduce Labour Turnover • One should look at the following points to reduce the labour turnover: – Pay problems – Employees leaving to further their career – Employees leaving due to conflict – The induction crisis – Shortage of labour – Changes in working retirements 07/09/09

Chandrakant@SOM,KIIT University

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