Unit 2
Elements of Cost
Concept and techniques
A material is a substance (physical term) that is part of a finished product or is composed of a finished product. In other words, a material is a product that is supplied to a business for the purpose of consuming it in the process of manufacturing or providing services, or for the purpose of converting it into a product. The term "store" is often used as a synonym for material, but store has a broader meaning, not only the raw materials consumed or used in production, but also miscellaneous goods, maintenance stores, processed parts, components. Also includes items such as tools. Jigs, other items, consumables, lubricants, etc. Finished and partially finished products are also often included in the term "store". Materials are also called inventory. The term material / inventory includes not only raw materials, but also components; work in process, finished products, and scrap.
Material costs are an important component of the total cost of a product. It accounts for 40% to 80% of the total cost. Percentages may vary from industry to industry. But for the manufacturing sector, material costs are paramount. Inventory is also an important component of working capital. Therefore, it is treated the same as cash. Therefore, analysis and control of material costs is very important.
Purpose of material management system
Material management: The ability to ensure sufficient inventory of goods to meet all requirements without carrying unnecessarily large amounts of inventory.
The purpose of the material management system is to:
1. Make the material available continuously so that the flow of material for production is uninterrupted. Production cannot be postponed due to lack of materials.
2. Purchase the required number of materials to avoid working capital locks and minimize the risk of surplus or obsolete stores.
3. Make competitive and wise purchases at the most economical prices so that you can reduce material costs.
4. Purchase the right quality material to minimize the waste of material.
5. Acts as an information centre for material knowledge about prices, suppliers, lead times, quality and specifications.
For manufacturing concerns, there is another purchasing department under the control of the purchasing person. The main function of the purchasing department is to purchase the required number of materials in time so that the store can provide the production department with a continuous supply of materials and purchase higher quality materials at a reasonable price.
Buyers need to play an important role as they can save or lose a lot of money. He requires good technical knowledge of the industry and some management skills. He also needs to be aware of management policies and sources of concern.
He also needs to be aware of market conditions and have knowledge of suppliers, trusted suppliers, prices and purchasing procedures.
He must keep up with government policies on import and export restrictions and various tariffs and taxes on goods. He must have practical knowledge of the law relating to contracts and the sale of goods so that he can negotiate and enter into contracts on behalf of his employer.
Centralized and Decentralized purchases:
Centralized purchase:
Centralized purchase means the purchase of materials by one specialized department. The purchasing department has personnel with expertise in all aspects of the material. The purchasing department has the authority to make purchases for the entire organization.
In this system, the requirements of the entire organization are confirmed through the creation of purchasing budget, the purchasing department makes purchases according to the accepted principle, and the materials are distributed to each production department according to the requirements.
In most cases, the purchasing department purchases materials based on the requisition form issued by the store. The supplier delivers the material to the Material Receipt section. Individual departments are not allowed to purchase their own materials when centralized purchases are made.
Decentralized purchase:
Decentralized purchases mean that each department can purchase materials according to their needs. Therefore, the authority to make purchases rests with the individual departments.
(A) Advantages of local purchase: If the production unit is far from the body, it is beneficial to have the unit available for purchase locally. You can enjoy the benefits of basic low price and seasonal price, and reduce the cost.
(B) Reduction of transportation costs: By supplying materials locally, transportation costs will be significantly reduced.
(C) Quick resolution of the problem: Disputes caused by refusals, shortages and returns can be resolved easily and quickly.
Advantages of centralized purchase:
From a centralized purchase, you can derive the following benefits:
(A) Benefits of bulk purchase: Because materials are purchased in bulk, trade discount rates are high, credit lines are improved, bargaining power, quantity, and discounts are increased, so materials can be purchased at much lower prices.
(B) Maintaining quality: All purchases are made by the purchasing department, which has expertise in product quality, which helps maintain the quality of the materials and ultimately leads to the production of better-quality finished products. Improving product quality ensures that your business is more credible, resulting in higher sales and higher profits.
(C) Reduction of transportation costs: This system purchases materials in bulk, significantly reducing shipping costs. This has a positive impact on the total cost or unit cost of the material. This makes your organization more competitive.
(D) Advantages of specialization: The Purchasing Department has dedicated purchasing personnel to ensure the right purchases from the right type of supplier. This guarantees both quality and price.
(E) You can avoid duplication: All purchases are made by one person, avoiding duplicate purchases.
(F) Planned purchases: You can systematically eliminate the purchase and holding of surplus stores, which enables better space management and easily avoids unnecessary blocks of working capital.
Restriction:
The restrictions on centralized purchases are as follows:
(A) Expensive
The management costs of the purchasing department can be very high, resulting in a solid increase in total costs and defeating the very purpose of costs to reduce costs.
(B) It functions as an obstacle to smooth functioning.
If a production department does not have the materials it needs, it must wait for the purchasing department to purchase it. This delay leads to production outages, which in turn leads to increased costs.
Purchasing routine:
In general, the following routine is used to purchase materials.
(I) Request for purchase. The request is made by the store officer.
(II) Offering bids and quotations for the supply of the required amount of material.
(III) Place an order with a supplier after considering bids and quotations submitted by different suppliers.
(IV) Receipt of material after proper inspection.
(V) Confirm and pass the supplier's payment invoice.
Purchase requisition:
The decision to purchase the material is made by the purchasing department after receiving the purchase request from the authorized department. A purchase request is made from an approved department to the purchasing department in a prescribed form called a purchase request.
Requisitions provide three basic pieces of information that help buyers perform their purchasing functions efficiently.
The information is as follows:
- What materials to buy (purchasing the right quality).
- When to buy (appropriate time).
- Amount to purchase (appropriate quantity).
Purchase requisitions are received by the purchaser from:
(I) Shopkeepers of all standard materials.
(II) Production control department of non-standard materials required for production.
(III) Plant and maintenance engineers for special maintenance and capital investment.
(IV) Head of special items such as office supplies.
The requisition is created three times. Two copies will be sent to the purchasing department, one copy will be retained as proof of approval and the other copy will be returned to the inventor after quoting the order details. Purchasing department. A third copy is kept by the store for office records and future references.
Material specifications or bill of materials:
The requisition contains details and specifications of the materials to purchase. Material specifications are known as bills of material. This starts in the production control department or the plant and maintenance engineer department. The BUI of Material is a complete schedule of materials or parts required for a particular job or work order created by a drafting office.
A bill of materials is created for every job and a copy is sent to the storekeeper.
BOM Benefits:
The following benefits can be obtained in different departments of the BOM.
(i) Upon receiving the bill of materials, the purchasing department can place an order with the supplier of choice. Therefore, the bill of materials serves the purpose of the purchase requisition.
(ii) The bill of materials allows the store to publish materials.
(iii) The bill of materials contains details of the materials used in the job or work order, so the supervisor does not need to prepare detailed material requirements. This saves time and makes it easier to pull out the material.
Purchase time:
Requisitions indicate the date on which the use of the material is required. The storekeeper makes a request to the purchaser as soon as the material reaches the reorder level. Upon receiving the purchase requisition, the purchaser places an order with the supplier with a delivery date.
Delivery times are fixed taking into account the material consumption rate and the minimum level fixed to it.
Purchases are also made when market conditions are good, despite the fact that there is no immediate need for materials for production. In an inflationary economy, we buy materials in bulk in the hope that prices will rise further.
For raw materials such as jute, cotton and sugar cane, quantity, quality and price are used to make bulk purchases during the season. To prevent future price increases, long-term contracts may be entered into with suppliers to purchase materials for a specified period of time and at a specified rate.
However, in doing so, the purchaser must take into account the following factors:
(I) A storage facility for storing quantities.
(II) Financial resources of concern. And
(III) Transportation costs, capital costs, storage costs, etc.
Purchase quantity:
Before placing an order with a supplier, the purchaser must ensure that only the right quantity of stores is purchased. The following factors should be taken into account when determining the purchase quantity:
(I) Material inventory levels must be maintained to meet the requirements of the production sector.
(II) Production is not hindered by a shortage of raw materials.
(III) There should be no excess inventory or material shortage inventory to unnecessarily block working capital. And
(IV) Availability of funds
Purchase order:
Definition:
A purchase order is an agreement between a material buyer and a supplier. It is a requirement from the purchaser to the supplier to supply goods of a specific quantity and quality in accordance with the terms set forth in the contract. It also means the buyer's commitment to deliver and pay for the goods according to the terms and conditions stated on the purchase order.
After carefully determining the purchase quantity, the purchasing department should place an order with the supplier of choice. You need to choose a supplier that can deliver the products you need at a competitive price and at the right time. We are looking for a quote from our supplier.
Quotations received from different suppliers are compared and an acceptable supplier is selected. After completing the above procedure, a purchase order will be issued to the supplier to supply the required quantity of goods at the specified time.
Purchase order i is issued in the prescribed format, produced in quadruples (4 copies), and sent to the next department for reference and coordination.
(I) the first copy will be sent to the supplier.
(II) One copy will be sent to the department that sent the purchase requisition.
(III) One copy will be sent to the store or the internal department of the product.
(IV) One copy will be kept in the purchasing department as a permanent record.
(V) A copy will be sent to your account department.
Purchase procedure:
Purchasing departments need to follow specific steps for efficient purchasing. The purchasing procedure includes the following steps:
(1) Purchase request:
Receive purchase requisitions that you might receive from your store, production control department, or department manager. The amount of material you purchase should be carefully determined.
(2) Supplier search:
Purchasing departments need to find potential suppliers. Care must be taken when choosing the right supplier. Once the supplier has been identified, you will be asked to submit a quote or bid. You need to start bidding and select a supplier considering the conditions stated in the bid.
(3) Purchase order:
Once a supplier is selected, you need to pass the purchase order to the selected supplier. A copy of the purchase order should be sent to the original department, the accounting department, and one copy to the costing department.
(4) Receipt of materials:
The materials you receive must be entered in the receipt note and sent to the inspection department for inspection. After receiving the inspection report, the material is sent to the store and shipped to the manufacturing department.
To better understand the chart in this regard, it is shown below.
Receipt of goods:
The following chart shows the procedure for receiving and inspecting materials.
The warehousing department is usually located at the entrance of the factory. All carriers of goods are to report to this department. After receiving the delivery note or shipping advice from the supplier, the receiving department must arrange the unloading of the goods.
The receiving office must receive the goods after comparing the quantity, quality, and other details that should have been included in the purchase order. When you receive the item, you should check it by weighing, counting, or inspection.
If there is any damage or missing, you should state that fact on the carrier's copy or Challan. After being satisfied in all respects, the recipient of the goods must sign a copy of the carrier Challan. Next, you need to enter the item details on the receipt (below). The receipt memo is an important document and is required to confirm the supplier's invoice and pass it to payment.
The goods receipt note is prepared with an additional copy distributed as follows:
(I) To the purchasing department to update the purchase record.
(II) To the department that sent the purchase request.
(III) To the accounting and inventory management department.
(IV) To the shop owner. And
(V) Stored in the receiving department for records and future reference.
(VI) Goods receipt note (GRN):
This is a testimony of the goods received according to the purchase order. Otherwise, the supplier will be notified by formal contact. When making adjustments for damaged or defective items, it is customary to send a debit note to the supplier with the value of the damaged or rejected item and the shipping costs for the return.
Confirmation of purchase invoice:
Along with the goods, the supplier sends an invoice containing details of the materials supplied and their price.
The purchaser who receives the material should refer to the following document to verify the accuracy of the details.
(I) Order form.
(Ii) Receipt notes.
(Iii) Inspection report.
(IV) Debit notes (if any).
If the invoice is determined to be correct, it will be stamped with a rubber stamp by the responsible authority of the purchasing department and passed to the accounting department for payment. Invoices are now checked by an authorized person in the accounting department to ensure that the calculations are correct.
The invoice will be entered in the purchase diary that will be credited to the supplier's account. Periodically, the purchase journal totals are debited to the general ledger purchase account.
Goods receipt note (GRN) testimony of the goods received according to the purchase order
After the purchase, receipt and inspection of materials, the next most important step in the process of material control is concerned with’ the storage of materials which is termed as ‘storekeeping’. Storekeeping is that aspect of material control which is concerned with the physical storage of goods. For carrying the task of storekeeping, a separate stores department under the charge of a storekeeper is set up. The storekeeper should have the technical knowledge and experience in stores routine and the ability of organising various activities relating to the storage of goods, An efficient system of storekeeping should:
1) Ensure uninterrupted supply of materials and stores without delay to various production and service departments of the organisation.
2) Prevent overstocking and under stocking of materials.
3) Minimise the cost of storage.
4) Prevent all kids of stores from theft, deterioration, evaporation and pilferage. 5) Ensure an effective utilisation of available storage space and workers engaged in the process of storekeeping.
6) Develop a system of providing necessary information about the material items in the stores as and when required.
Functions of Storekeeping The following functions are performed by the stores department:
1) Receipt of material from the goods receiving department and ensuring that every Item of stores received by a storekeeper is duly supported by an indent, a purchase order, an inspection note and a goods received note.
2) Issue purchase requisition to the purchase department when the stock of material reaches the re-order level.
3) Maintain proper record of receipt, issue and balance of all items of materials, and check the bin card balances with the physical quantities in the bins.
4) Placing and arranging materials received at proper and appropriate places and adhering to the golden principle of storekeeping, i.e., a-place for everything and everything in its place.
5) Issue stores, against proper authorisation, in right quantity of right specification, and at the right time.
6) Minimising the storage handling and maintaining costs.
7) Ensuring that the stocks neither exceed the maximum leve1 nor go below the minimum level at any point of time.
8) Preventing the entry of unauthorised persons into the stores.
9) Co-ordination and supervision of staff in the stores department.
10) Carrying out a regular review of the items of stores in hand for locating slow moving and non-moving items so that the necessary steps may be taken for their disposal before they become obsolete.
Location and Lay-out of Stores
The location of stores department should be undertaken very carefully. The management should keep in mind various important considerations before selecting proper site for locating the stores department. It should be close to the receiving department so that the transportation charges can be minimised. At the same time, there should be an easy access to all other departments of the factory, roads, railways siding and wharf. Proper lay-out of stores is also of vital importance. Lay-out refers to the internal arrangement or placement of materials inside the stores. It aims at effective utilisation of space available for storage of materials. The stores should be divided into racks which should be sub-divided into small spaces. All these spaces are known as bins. For every kind of material, a bin is allotted. All bins should be serially numbered. The stores department should be equipped with racks, shelves, boxes crates, barrels, drums, cylinders and other receptacles for storing the different items. The receptacles should be arranged in such a way as to make the fullest utilisation of available space. At the same time, they should be easily accessible. Enough space should be provided for the movement of trucks, conveyors, lifts and other mechanical devices. A proper location and lay-out would ensure economy in materials handling, transportation costs, minimise wastage, ensure effective supervision and control.
Issue of Materials
All items in stores are meant issuance to various production departments. The procedure for the issue of material is normally laid down by the management. The storekeeper should not issue the materials unless a properly authorised material requisition is presented to him. The requisition is prepared by the foreman or the head of the department. It is prepared in triplicate; two copies are sent to the stores department and the third copy is retained by the requisitioning department for its own reference. On receipt of the materials requisition, the storekeeper issues the necessary materials against the signatures of the person receiving the materials. One of the copies of the materials requisition is used by the storekeeper for making the necessary entries in the bin card. The other copy is sent to the costing office for pricing the issues and making the necessary entries in the store’s ledger.
Issue of Materials # Basic Requirement:
Since large sums of money remain blocked in materials, it is essential for the custodian of materials to ensure that the issue of materials are made only under proper authorisation.
In fact, authorisation of stores is very vital.
Moreover, for efficient operation, the following points to be considered:
(a) Authorisation of issues
(b) Identification of requirements
(c) Timing of issues.
(a) Authorisation of Issues:
Since materials represents money, for the issue of materials there must be some authorisation by responsible officers nominated by the management. Such authorisation should be given clearly in the form of a directive circular.
The object is to avoid misunderstanding and unpleasantness that may arise due to the refusal by the storekeeper to issue materials. In many industries, the designation of the person authorised to draw materials along with their specimen signature are sent to the stores for verification.
The request for issue of materials is invariably made in written form or documents for proper authorisation. It is the primary responsibility of the storekeeper to verify all such documents for proper authorisation before the materials are issued.
Even though certain persons are authorised to draw goods from the stores, management normally imposes a few restrictions for drawl of the goods beyond a certain level of consumption. In all such cases, a clear directive must be given to the stores department.
(b) Identification of Requirement:
Largely due to ignorance, in several cases the correct description of the items is not given by the user department. Often the code number given may not tally with the description of the goods, and vice versa. Hence an experienced store-keeper should use his intelligence to identify the mistake and suggest to the indenter the correct item.
Details about materials requirements such as part number, code number, etc. ensure that it is supplied without delay and unnecessary correspondence.
(c) Timing of Issue:
The store’s manager should ensure that the indenting departments are fully aware of the timing of issues. However, there may be sudden rush during the peak hours. This may put undue pressure on the stores department and may lead to sudden stoppage of production, in case of undue delay.
So, our intelligent store-keeper should study carefully the requirements of various departments and stagger (spread) the timings in such a way that each department can draw their requirements without loss of time.
The important methods to follow in pricing material issuance are: -
1. Actual cost method
2. First-in first-out (FIFO) method
3. Last-in first-out (LIFO) method
4. Maximum first-in first-out method (HIFO) method
5. Simple average cost method
6. Weighted average cost method
7. Periodic average cost method
8. Standard Cost method
9. Exchange cost method
10. Last-in first-out (NIFO) method
11. Base stock method.
1. Actual cost method:
If you purchase a material specifically for a particular job, the actual cost of the material will be charged to that job. Such materials are usually kept separately and published only for that particular job.
2. First-in first-out (FIFO) method:
CIMA defines FIFO as "a method of setting the price of material issuance using the purchase price of the oldest unit in stock." With this method, the materials are issued out of stock in the order in which they were first stocked. It is assumed that the material that opens first is the material that is used first.
Advantage:
(A) Easy to understand and easy to price in question.
(B) It is a good store management practice to ensure that raw materials leave stores in chronological order based on age.
(C) This is an easy method with less administrative costs than other pricing methods.
(D) This inventory valuation method is accepted under standard accounting practices.
(E) Consistent and realistic practices in inventory and finished product valuation.
(F) Inventory is valued at the latest market price, close to the value based on replacement costs.
Cons: Disadvantages:
(A) If confused with other materials purchased at a different price at a later date, it is uncertain whether the material with the longest stock will be used.
(B) If the price of the purchased material fluctuates significantly, there will be more clerical work and errors may occur.
(C) Manufacturing costs are modest in situations where prices are rising.
(D) Inflationary markets tend to lower prices for key issues. The deflationary market tends to set higher prices for these issues.
(E) Generally, it is necessary to adopt multiple prices for the publication of a single document.
(F) This method makes it difficult to compare costs for different jobs when billed for the same material at different prices.
3. Last in first out (LIFO) method:
With this method, the latest purchase is issued first. Issues are priced on the latest batch you receive and will continue to be billed until the new batch you receive arrives in stock. This is a way to set the issue price of a material using the purchase price of the latest unit in stock.
Advantage:
(A) Shares issued at more recent prices represent the current market value based on exchange costs.
(B) Easy to understand and apply.
(C) Product costs tend to be more realistic as material costs are billed at more recent prices.
(D) When the price is rising, the issue pricing will be the more recent current market price.
(E) It tends to show modest profit figures by minimizing unrealized inventory gains and valuing inventory at its pre-price value, providing a hedge against inflation.
Cons: Disadvantages:
(A) Valuation of inventory in this way is not accepted in the creation of financial accounting.
(B) This is an assumption of a cash flow pattern and is not intended to represent the actual physical flow of material from the store.
(C) It may be necessary to adopt multiple prices for one problem.
(D) It becomes difficult to compare costs between jobs.
(E) It involves more clerical work and sometimes the evaluation may go wrong.
(F) During inflation, the valuation of inventory in this way does not represent the current market price.
4. Highest in first out (HIFO) method:
With this method, the most expensive material is published first, regardless of the date of purchase. The basic assumption is that in a fluctuating inflation market, material costs are quickly absorbed into product costs, hedging the risk of inflation. This method is used when the material is in short supply and when you are running a contract with costs. This method is uncommon and is not accepted by standard accounting practices.
5. Simple average cost method:
In this way, all the materials received are merged into the inventory of existing materials and their identities are lost. The simple average price is calculated regardless of the quantity involved. The simple average cost is obtained by dividing the number of batches and adding the various prices paid during the period to the batches purchased. For example, three batches of material received in Rs. 20, rupees 22 and Rs. 24 per unit each.
The simple average price is calculated as follows:
Rs. 20+ rupees 22+ rupees 24/3 batch = Rs. 36/3 batch = 22 rupees per unit
This method takes into account the prices of different batches, but is not common because it does not take into account the quantity purchased in different batches. Use this method when the price is less volatile and the stock price is small.
6. Weighted average cost method:
This is a permanent weighted averaging system in which the issue price is recalculated each time after each receipt, taking into account both the total quantity and the total cost when calculating the weighted average price. For example, three batches of material received in a quantity of 2,000 units @ Rs. 25, 2,300 units @ Rupee 26 and 800 units @ Rs. 24.24.
The weighted average price is calculated as follows:
(2,000 units x Rs .25) + (2,300 units x Rs .26) + (800 units x Rs .24) / 2,000 units + 2,300 units + 800 units
= Rs. 25,000+ rupees 20,800 + rupees 22,200 / 3,200 units = rupees 47,000 / 3,200 units = 25.26 per rupee unit
This method tends to smooth out price fluctuations and reduce the number of calculations because each issue is billed at the same price until you receive a new batch of material.
This method is easier than FIFO and LIFO because you do not have to identify each batch individually. However, this method adds more clerical work in calculating the new average price each time you receive a new batch. The calculated issue price rarely represents the actual purchase price.
7. Periodic average cost method:
With this method, instead of recalculating the simple or weighted average cost each time you have a receipt, the average for the entire accounting period is calculated.
The average price of all materials published during the period is calculated as follows:
8. Standard cost method:
In this way, important issues are priced at a given standard issue price. The difference between the actual purchase price and the standard issue price is amortized on the income statement. The standard cost is a predetermined cost set by management before the actual material cost is known, and the standard issue price is used for all issuance to production and valuation of final stock.
Careful setting of standard prices first significantly reduces all clerical work and errors and simplifies inventory recording procedures. Eliminating cost fluctuations due to material price fluctuations makes it easier to compare realistic manufacturing costs. This method is not suitable in situations where prices fluctuate.
9. Exchange fee method:
The replacement cost is the cost of replacing the same material by purchasing it on the pricing date of the material issue. It is different from the actual cost on the purchase date. The exchange price is the exchange price of the material at the time the material is issued or on the valuation date of the end-of-term inventory.
This method is unacceptable to standard accounting practices as it reflects costs that are not actually paid. If the shares are held at exchange costs and are purchased at a lower price for balance sheet purposes, an element of profit that has not yet been realized will be included in the income statement.
This method is advocated by charging the job or process for the market price of the material, making it easier to determine the profitability of the job or process. This method is especially suitable for inflationary trends in material market prices. Without the exact market for a particular material, it is difficult to ascertain the replacement price for a material problem.
10. Next Inn First Out (NIFO) Method:
This method is a variant of the exchange cost method. In this way, the price quoted in the latest purchase order or contract is used for all issuance until a new order is placed.
11. Basic stock method:
With this method, the specified quantity of material is always kept in stock and priced as a buffer or base stock at its original cost. In addition, issuance of materials that exceed the basic stock quantity is priced using one of the above methods.
This method shows how prices fluctuate over time. However, this method is uncommon and makes stock valuation completely unrealistic and is not accepted by standard accounting practices.
Accounting for Labour: Labour cost control procedure
Most companies are continually trying to improve efficiency. One-way companies analyse efficiency is to look at expenses such as salaries and decide whether to make changes. If a particular payroll calculation is not satisfactory, the company may change its policy.
About labour utilization
Labour costs are usually one of the biggest costs for a company, so most companies want to make sure that labour costs contribute to revenue generation. The direct labour utilization calculation shows what portion of total salary expenditure a company pays for direct work, that is, work directly related to income-generating projects. The remaining salary costs are usually indirect labour costs such as training, marketing, management, paid leave, and taxes.
Calculation
To calculate the direct labour utilization rate of salary, divide the amount of salary paid for direct labour by the total salary cost for the period. For example, if you spend $ 3,000 on salary during a payroll period, of which $ 2,000 is paid directly as labour costs, the direct labour utilization rate for that period is 66.7% ($ 2,000 / $ 3,000 = 66.7).
Interpretation
The direct labour utilization rate of most companies is about 65%. The higher the direct labour utilization rate of a company, the more efficient the company operates. Companies with a large amount of paid training and paid leave have lower rates of direct work than companies with less paid training and paid leave. These taxes have little effect on the interpretation of direct labour utilization, as all companies pay the same percentage of payroll tax.
Things to consider
Many companies directly monitor labour utilization on a monthly basis to assess the efficiency of their business operations. If the company determines that the utilization rate of direct labour is too low, it will make efforts to increase the ratio by reducing indirect labour costs. However, companies may try to reduce indirect labour costs as much as possible, and some of these costs are needed for successful business operations.
Direct and Indirect Labour
Classification of labour costs
Labour costs can be categorized as follows.
1. Direct labour costs
Direct labour costs are part of salary or wages and can be identified and billed by a single unit price of production.
Characteristics of direct labour costs:
Direct labour costs have the following characteristics.
- It has a direct relationship to the product, process, or cost unit.
- It can be measured quantitatively.
- A sufficient amount of material.
2. Indirect labour costs
Even if it occurs directly, it cannot be identified in the production of goods or services. These costs are incurred at the production site. Some cost centres may serve production departments or production activities. These cost centres are responsible for purchasing, engineering, and time management.
3. Manageable labour costs
Labour costs can be managed by managers during production and even when there is no production. Standard hours and hourly rates are fixed and workers can be required to complete a job or order within such time. That way, labour costs can be reduced to some extent.
4. Uncontrollable labour costs
Labour costs that management cannot easily control. Jobs and orders can be completed by a group of workers. The efficiency of such labour groups is inherently different. Workers can maximize their efficiency according to the general environment of the product location. If so, costs cannot be controlled by management.
Direct labour refers to salaries and wages paid to workers who are directly involved in the manufacture of a particular product or the implementation of a service. The work performed must be related to a particular task. In the business of providing services to customers, direct labour is the work performed by workers who provide services directly to customers, such as auditors, lawyers, and consultants.
Wages paid are considered indirect if the work performed is not associated with a particular employee. If you want to track the total costs incurred in a particular project, you need to add direct labour costs as they can make up the majority of the project.
How to measure direct labour
Direct work includes the cost of regular working hours and the cost of overtime hours. This includes related payroll taxes and expenses such as social security, Medicare, unemployment tax and worker employment insurance. Companies must include contributions to the pension plan as well as health insurance costs. Some companies may include employee training and development costs incurred during the hiring process.
When calculating labour costs directly, the company must include all cost items incurred in maintaining and hiring employees. In addition to what you pay your employees, the company must consider the costs of retaining employees, such as payroll tax burdens, insurance premiums, and benefits.
Most companies have standard hourly rates that estimate the expected direct labour costs under normal conditions. For example, suppose you have a direct labour cost of $ 10 per hour to assemble stroller seats, and your company expects to spend 0.5 hours assembling each car seat. If the company produces his 1,000 units, the standard direct labour cost would be $ 5,000 ($ 10 x 0.5 x $ 1,000).
What is Indirect labour?
Indirect labour costs are labour costs that are not directly related to the production of goods or the provision of services. This refers to the wages paid to workers who perform duties that allow others to produce goods and provide services.
Unlike direct labour costs, indirect labour costs are not easily associated with a particular unit. Employees in this group include managers and managers such as supervisors, accountants, security guards, and cleaners.
What is indirect labour?
The workforce is defined as the total workforce and expertise needed to complete a job. It can be divided into direct labour and indirect labour.
Overhead is a category of overhead and refers to employees who directly support overhead in performing their work. It is not directly involved in the service or production process.
Indirect labour cannot be traced back to a particular product or service, so the associated costs cannot be charged to the goods produced or the services provided. This represents the business overhead required to support operational levels.
What is an example of indirect labour?
Imagine you are the owner of a construction company. Consider both direct and indirect work when considering a contract. Direct labour costs are easy to understand. This refers to expenses, including wages and other benefits, incurred by employees directly engaged in projects such as workers, riggers, foreman and pipe fitters.
Indirect work refers to employees who are not involved in planning or construction projects. However, they are involved in running their day-to-day business. This includes human resources, management, accounting, customer service and more.
Examples of indirect labour include:
Computation of Labour cost
How to Calculate Labour Cost: Per Hour, Per Unit, Techniques and Formula
Techniques for managing labour costs can be effectively used by coordinating the activities of various labour-related departments.
(A) Human Resources Department
(B) Engineering and Operations Research Division
(C) Timekeeping department
(D) Payroll department and
(E) Cost accounting department.
The capabilities of these departments in reviewing and managing labour costs are described in detail below.
(A) Human Resources Department:
The Board of Directors has policies regarding recruitment, training, placement, transfer and promotion of employees. The Human Resources Manager of the Human Resources Department must implement these policies. The main functions of this department are recruitment, training, and placement of workers in the right jobs.
The Human Resources department recruits’ workers when it receives employee placement requests from various departments.
(B) Employee placement request:
This is a document initiated by a department that needs employees. Upon receipt of the job, the Human Resources Department will take action to appoint a worker by receiving the application, scrutinizing the application, interviewing the applicant, and finally selecting the appropriate candidate.
Key takeaways:
- Most companies are continually trying to improve efficiency. One-way companies analyse efficiency is to look at expenses such as salaries and decide whether to make changes.
- The direct labour utilization rate of most companies is about 65%.
- The higher the direct labour utilization rate of a company, the more efficient the company operates.
- Even if it occurs directly, it cannot be identified in the production of goods or services.
- Wages paid are considered indirect if the work performed is not associated with a particular employee.
- Indirect labour costs are labour costs that are not directly related to the production of goods or the provision of services.
Labour turnover rate:
Labour turnover can be defined as the number of workers replaced during a particular period relative to the average workforce during the period. This is the number of workers who quit their jobs during the period relative to the average workforce during the period. It is a factor that affects labour efficiency and thus labour costs.
Definition: Turnover can be defined as the overall change in the number of people employed by an entity during a particular time period. This takes into account the number of employees leaving, new subscribers, and the total number of employees listed on salary at the end of a given period.
High turnover rates are considered unfavourable for organizational stability and can even lead to temporary closures and strikes. Therefore, entities take human resources as an integral part of their business. It means the rate of change in the composition of the workforce.
There are three ways to measure it:
- Calculating Labour Turnover by Separation Method
Labour Turnover = No. of workers left or separated during a period / Average number of workers on role during that period x 100
Average No. Of. Workers = (No. Of workers at the beginning of the period + No. Of workers at the end of the period) / 2
2. Calculating Labour Turnover by Replacement Method
Labour Turnover = No. Of workers replaced during a period / Average number of workers on role during that period x 100
3. Calculating Labour Turnover by Flux Method
Labour Turnover = No. Of workers separated in a period + No. Of workers replaced in the same period) / Average number of workers on role during that period x100
Turnover rate due to new hires: Workers who participate in a business to expand their business do not generate a turnover rate. Some cost activists believe that newly hired workers are responsible for changes in the composition of the workforce. The turnover rate of new workers is as follows.
- A high turnover rate is bad because it indicates that the worker will not stay long. When they go, they bring their experience with them. New workers must be engaged and trained. Aside from the cost of hiring and training new workers, their quality is expected to decline. Therefore, the turnover rate of workers is very costly for employers, but when workers take a break from work or get a job that is not suitable for them, they also lose.
- Both worker turnovers and shifts are costly, but most of the turnover costs usually occur during shifts. Separation is the cause of sales and the exchange continues.
- There is a certain amount of irreducible turnover due to illness, death, retirement, or marriage of female workers. However, research shows that actual sales are unnecessarily high in most industries.
Causes of turnover:
Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions, bad treatment on the part of employers, or simply the raging nature of workers. Therefore, the cause may be unavoidable.
The avoidable causes of turnover are:
(1) Redundancy due to seasonal fluctuations, material shortages, project completion, etc. The efficiency and foresight of senior management can eliminate sales from these causes.
(2) Boring work
(3) Bad working conditions
(4) Low wages
(5) Unstable employment
(6) There are few opportunities for promotion
(7) Unfair treatment
(8) Labour dispute.
The unavoidable causes are as follows:
(1) Difficulty of housing
(2) Personal improvement
(3) Domestic responsibility
(4) Illness and accident
(5) Leave the district
(6) Discharged because it was judged to be inappropriate
(7) Discharge due to disciplinary action
(8) Retirement
(9) Death.
Employers can significantly reduce worker turnover, thereby saving labor costs.
Labour turnover cost:
It is a good idea to calculate the labour turnover cost individually.
It consists of:
(A) Recruitment costs for additional men engaged due to excessive turnover.
(B) Training costs for additional men engaged. And
(C) Loss due to reduced production quantity and quality due to sales, represented by lack of recovery of hourly wages and fixed costs.
(D) Costs of lost time, wasted, scrap, defective work and tools, and machine damage due to inefficiencies of new employers.
(E) Cost of products lost due to delayed acquisition of new workforce.
(F) Frequency of accidents due to lack of experience of new employees.
Impact on labour turnover
When an employee leaves the organization, it affects the work of some or even the entire entity.
This effect can be both constructive and destructive to the organization. When workers leave the company in groups, the impact is even greater and productivity is reduced.
Harmful effects
First, let's talk about the negative effects of turnover within an organization.
- Impede productivity: When an employee quits a job, production is temporarily stopped or slowed down until a new employer joins the organization.
- Demoralization: Colleagues lose motivation when they find that a retired employee is retiring for a better opportunity.
- Increased production costs: During the training or learning phase of a new employee, the cost increases due to reduced productivity and high waste.
- Training Costs: Wages paid to trainees, new employees, and mentors during unproductive training periods are a significant expense to the organization.
- Replenishment Costs: Recruiting new staff to fill the position of retired employees includes advertising, employment, and training costs.
Positive effect
Labour turnover also has several benefits for the organization. This is explained in detail below.
- Improve your organizational culture: Turnover means the entry of new people with different values, ideas and beliefs to enrich your organizational culture.
- More talented people: new hires are more efficient, knowledgeable, sensitive and active than existing employees.
- Cheaper Resources: Due to continuous price increases and promotions, existing workers will cost more than alternative cheap trainees.
- Injecting Fresh Ideas: New resources bring innovative ideas and ways of doing things. This is very beneficial to the organization.
- Better Skills and Qualifications: Evolving courses and skill training allow organizations to acquire new graduates with better abilities.
Types of turnovers
Turnover can be distinguished based on employee spontaneity and its impact on the organization. Below are four basic types of her.
- Voluntary: When an employee voluntarily leaves the organization, that is, when the person resigns from work for some reason, it is called voluntary turnover.
- Involuntary: In the case of involuntary turnover, the worker is excluded from the job by management. It may be due to reasons such as non-compliance with the norms.
- Functional: Being functional means improving the efficiency of your organization.
- Dysfunction: Dysfunctional labour shifts occur when highly efficient and skilled employees quit their jobs by interfering with the overall functioning of the organization.
Strategy to reduce turnover
Turnover is an unavoidable aspect of business. However, you can control it by taking timely actions and improving existing HR policies.
Let's look at other ways to reduce the number of exits.
Management must make constant efforts to promote good relationships with healthy employees within the organization. Wage and incentive plans should be reviewed and upgraded annually to ensure fair wages for workers.
Another way is to change your personnel policy according to the guidelines set by government and corporate behaviour. In addition to fair wages, we can maintain employee employment by providing a variety of incidental benefits such as insurance, medical facilities and transportation.
Retirement interviews provide a definitive reason for turnover, so do it to get an idea of all the things you need to improve. Workplace facilities such as adequate ventilation, lighting, drinking water and cleanliness must be maintained.
Organizations should not underestimate labour welfare and take appropriate steps to empower their talent. Corporate compensation and compensation planning must be progressive to motivate and evaluate talented employees.
Ground-level employee ideas can prove beneficial to the organization. Therefore, they should be encouraged to share their views. Resolving conflicts and addressing the dissatisfaction and problems of workers in the workplace creates a healthy environment for all.
Managers and supervisors need to be open-minded about their subordinates in order to deepen their ties and understanding. All employees are looking forward to the growth prospects that the organization offers. Therefore, it is very advantageous to give employees the opportunity to be promoted.
Conclusion
Turnover is usually high in private organizations where many workers engage in day-to-day tasks that do not require expertise.
However, skill-based organizations are trying to maintain low turnover rates. This is because if their valuable resources leave the company, they will have to bear the cost of fairly high sales.
Although a small factor, employees tend to stay in the organization for longer if the employee orientation process is prominent.
Key takeaways:
- Labour turnover can be defined as the number of workers replaced during a particular period relative to the average workforce during the period.
- Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions.
- Employers can significantly reduce worker turnover, thereby saving labour costs.
- When an employee leaves the organization, it affects the work of some or even the entire entity.
- Turnover is usually high in private organizations where many workers engage in day-to-day tasks that do not require expertise
- Management must make constant efforts to promote good relationships with healthy employees within the organization.
- Wage and incentive plans should be reviewed and upgraded annually to ensure fair wages for workers.
- Turnover can be distinguished based on employee spontaneity and its impact on the organization.
- Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions, bad treatment on the part of employers, or simply the raging nature of workers.
- There is a certain amount of irreducible turnover due to illness, death, retirement, or marriage of female workers.
It is a type of non-monetary benefits provided by employer to employee. Fringe benefits are those expenses which are spent by an employer against the individual employees for their welfare. Normally such expenses do not form a part of their pay packet, e.g., ESI contribution made by an employer. Such expenses may be recovered separately as a percentage on labour cost or at an hourly rate. Alternatively, those may be treated as overheads and apportioned to cost centres on the basis of wages/salary cost.
References:
- Arora M.N: Cost Accounting - Principles and Practice; Vikas, New Delhi.
- Jain S.P. And Narang K.L: Cost Accounting; Kalyani New Delhi.
- Anthony Robert, Reece, etal: Principles of Management Accounting; Richard D. Irwin Inc. Illinois.
Unit 2
Elements of Cost
Concept and techniques
A material is a substance (physical term) that is part of a finished product or is composed of a finished product. In other words, a material is a product that is supplied to a business for the purpose of consuming it in the process of manufacturing or providing services, or for the purpose of converting it into a product. The term "store" is often used as a synonym for material, but store has a broader meaning, not only the raw materials consumed or used in production, but also miscellaneous goods, maintenance stores, processed parts, components. Also includes items such as tools. Jigs, other items, consumables, lubricants, etc. Finished and partially finished products are also often included in the term "store". Materials are also called inventory. The term material / inventory includes not only raw materials, but also components; work in process, finished products, and scrap.
Material costs are an important component of the total cost of a product. It accounts for 40% to 80% of the total cost. Percentages may vary from industry to industry. But for the manufacturing sector, material costs are paramount. Inventory is also an important component of working capital. Therefore, it is treated the same as cash. Therefore, analysis and control of material costs is very important.
Purpose of material management system
Material management: The ability to ensure sufficient inventory of goods to meet all requirements without carrying unnecessarily large amounts of inventory.
The purpose of the material management system is to:
1. Make the material available continuously so that the flow of material for production is uninterrupted. Production cannot be postponed due to lack of materials.
2. Purchase the required number of materials to avoid working capital locks and minimize the risk of surplus or obsolete stores.
3. Make competitive and wise purchases at the most economical prices so that you can reduce material costs.
4. Purchase the right quality material to minimize the waste of material.
5. Acts as an information centre for material knowledge about prices, suppliers, lead times, quality and specifications.
Unit 2
Elements of Cost
Concept and techniques
A material is a substance (physical term) that is part of a finished product or is composed of a finished product. In other words, a material is a product that is supplied to a business for the purpose of consuming it in the process of manufacturing or providing services, or for the purpose of converting it into a product. The term "store" is often used as a synonym for material, but store has a broader meaning, not only the raw materials consumed or used in production, but also miscellaneous goods, maintenance stores, processed parts, components. Also includes items such as tools. Jigs, other items, consumables, lubricants, etc. Finished and partially finished products are also often included in the term "store". Materials are also called inventory. The term material / inventory includes not only raw materials, but also components; work in process, finished products, and scrap.
Material costs are an important component of the total cost of a product. It accounts for 40% to 80% of the total cost. Percentages may vary from industry to industry. But for the manufacturing sector, material costs are paramount. Inventory is also an important component of working capital. Therefore, it is treated the same as cash. Therefore, analysis and control of material costs is very important.
Purpose of material management system
Material management: The ability to ensure sufficient inventory of goods to meet all requirements without carrying unnecessarily large amounts of inventory.
The purpose of the material management system is to:
1. Make the material available continuously so that the flow of material for production is uninterrupted. Production cannot be postponed due to lack of materials.
2. Purchase the required number of materials to avoid working capital locks and minimize the risk of surplus or obsolete stores.
3. Make competitive and wise purchases at the most economical prices so that you can reduce material costs.
4. Purchase the right quality material to minimize the waste of material.
5. Acts as an information centre for material knowledge about prices, suppliers, lead times, quality and specifications.
For manufacturing concerns, there is another purchasing department under the control of the purchasing person. The main function of the purchasing department is to purchase the required number of materials in time so that the store can provide the production department with a continuous supply of materials and purchase higher quality materials at a reasonable price.
Buyers need to play an important role as they can save or lose a lot of money. He requires good technical knowledge of the industry and some management skills. He also needs to be aware of management policies and sources of concern.
He also needs to be aware of market conditions and have knowledge of suppliers, trusted suppliers, prices and purchasing procedures.
He must keep up with government policies on import and export restrictions and various tariffs and taxes on goods. He must have practical knowledge of the law relating to contracts and the sale of goods so that he can negotiate and enter into contracts on behalf of his employer.
Centralized and Decentralized purchases:
Centralized purchase:
Centralized purchase means the purchase of materials by one specialized department. The purchasing department has personnel with expertise in all aspects of the material. The purchasing department has the authority to make purchases for the entire organization.
In this system, the requirements of the entire organization are confirmed through the creation of purchasing budget, the purchasing department makes purchases according to the accepted principle, and the materials are distributed to each production department according to the requirements.
In most cases, the purchasing department purchases materials based on the requisition form issued by the store. The supplier delivers the material to the Material Receipt section. Individual departments are not allowed to purchase their own materials when centralized purchases are made.
Decentralized purchase:
Decentralized purchases mean that each department can purchase materials according to their needs. Therefore, the authority to make purchases rests with the individual departments.
(A) Advantages of local purchase: If the production unit is far from the body, it is beneficial to have the unit available for purchase locally. You can enjoy the benefits of basic low price and seasonal price, and reduce the cost.
(B) Reduction of transportation costs: By supplying materials locally, transportation costs will be significantly reduced.
(C) Quick resolution of the problem: Disputes caused by refusals, shortages and returns can be resolved easily and quickly.
Advantages of centralized purchase:
From a centralized purchase, you can derive the following benefits:
(A) Benefits of bulk purchase: Because materials are purchased in bulk, trade discount rates are high, credit lines are improved, bargaining power, quantity, and discounts are increased, so materials can be purchased at much lower prices.
(B) Maintaining quality: All purchases are made by the purchasing department, which has expertise in product quality, which helps maintain the quality of the materials and ultimately leads to the production of better-quality finished products. Improving product quality ensures that your business is more credible, resulting in higher sales and higher profits.
(C) Reduction of transportation costs: This system purchases materials in bulk, significantly reducing shipping costs. This has a positive impact on the total cost or unit cost of the material. This makes your organization more competitive.
(D) Advantages of specialization: The Purchasing Department has dedicated purchasing personnel to ensure the right purchases from the right type of supplier. This guarantees both quality and price.
(E) You can avoid duplication: All purchases are made by one person, avoiding duplicate purchases.
(F) Planned purchases: You can systematically eliminate the purchase and holding of surplus stores, which enables better space management and easily avoids unnecessary blocks of working capital.
Restriction:
The restrictions on centralized purchases are as follows:
(A) Expensive
The management costs of the purchasing department can be very high, resulting in a solid increase in total costs and defeating the very purpose of costs to reduce costs.
(B) It functions as an obstacle to smooth functioning.
If a production department does not have the materials it needs, it must wait for the purchasing department to purchase it. This delay leads to production outages, which in turn leads to increased costs.
Purchasing routine:
In general, the following routine is used to purchase materials.
(I) Request for purchase. The request is made by the store officer.
(II) Offering bids and quotations for the supply of the required amount of material.
(III) Place an order with a supplier after considering bids and quotations submitted by different suppliers.
(IV) Receipt of material after proper inspection.
(V) Confirm and pass the supplier's payment invoice.
Purchase requisition:
The decision to purchase the material is made by the purchasing department after receiving the purchase request from the authorized department. A purchase request is made from an approved department to the purchasing department in a prescribed form called a purchase request.
Requisitions provide three basic pieces of information that help buyers perform their purchasing functions efficiently.
The information is as follows:
- What materials to buy (purchasing the right quality).
- When to buy (appropriate time).
- Amount to purchase (appropriate quantity).
Purchase requisitions are received by the purchaser from:
(I) Shopkeepers of all standard materials.
(II) Production control department of non-standard materials required for production.
(III) Plant and maintenance engineers for special maintenance and capital investment.
(IV) Head of special items such as office supplies.
The requisition is created three times. Two copies will be sent to the purchasing department, one copy will be retained as proof of approval and the other copy will be returned to the inventor after quoting the order details. Purchasing department. A third copy is kept by the store for office records and future references.
Material specifications or bill of materials:
The requisition contains details and specifications of the materials to purchase. Material specifications are known as bills of material. This starts in the production control department or the plant and maintenance engineer department. The BUI of Material is a complete schedule of materials or parts required for a particular job or work order created by a drafting office.
A bill of materials is created for every job and a copy is sent to the storekeeper.
BOM Benefits:
The following benefits can be obtained in different departments of the BOM.
(i) Upon receiving the bill of materials, the purchasing department can place an order with the supplier of choice. Therefore, the bill of materials serves the purpose of the purchase requisition.
(ii) The bill of materials allows the store to publish materials.
(iii) The bill of materials contains details of the materials used in the job or work order, so the supervisor does not need to prepare detailed material requirements. This saves time and makes it easier to pull out the material.
Purchase time:
Requisitions indicate the date on which the use of the material is required. The storekeeper makes a request to the purchaser as soon as the material reaches the reorder level. Upon receiving the purchase requisition, the purchaser places an order with the supplier with a delivery date.
Delivery times are fixed taking into account the material consumption rate and the minimum level fixed to it.
Purchases are also made when market conditions are good, despite the fact that there is no immediate need for materials for production. In an inflationary economy, we buy materials in bulk in the hope that prices will rise further.
For raw materials such as jute, cotton and sugar cane, quantity, quality and price are used to make bulk purchases during the season. To prevent future price increases, long-term contracts may be entered into with suppliers to purchase materials for a specified period of time and at a specified rate.
However, in doing so, the purchaser must take into account the following factors:
(I) A storage facility for storing quantities.
(II) Financial resources of concern. And
(III) Transportation costs, capital costs, storage costs, etc.
Purchase quantity:
Before placing an order with a supplier, the purchaser must ensure that only the right quantity of stores is purchased. The following factors should be taken into account when determining the purchase quantity:
(I) Material inventory levels must be maintained to meet the requirements of the production sector.
(II) Production is not hindered by a shortage of raw materials.
(III) There should be no excess inventory or material shortage inventory to unnecessarily block working capital. And
(IV) Availability of funds
Purchase order:
Definition:
A purchase order is an agreement between a material buyer and a supplier. It is a requirement from the purchaser to the supplier to supply goods of a specific quantity and quality in accordance with the terms set forth in the contract. It also means the buyer's commitment to deliver and pay for the goods according to the terms and conditions stated on the purchase order.
After carefully determining the purchase quantity, the purchasing department should place an order with the supplier of choice. You need to choose a supplier that can deliver the products you need at a competitive price and at the right time. We are looking for a quote from our supplier.
Quotations received from different suppliers are compared and an acceptable supplier is selected. After completing the above procedure, a purchase order will be issued to the supplier to supply the required quantity of goods at the specified time.
Purchase order i is issued in the prescribed format, produced in quadruples (4 copies), and sent to the next department for reference and coordination.
(I) the first copy will be sent to the supplier.
(II) One copy will be sent to the department that sent the purchase requisition.
(III) One copy will be sent to the store or the internal department of the product.
(IV) One copy will be kept in the purchasing department as a permanent record.
(V) A copy will be sent to your account department.
Purchase procedure:
Purchasing departments need to follow specific steps for efficient purchasing. The purchasing procedure includes the following steps:
(1) Purchase request:
Receive purchase requisitions that you might receive from your store, production control department, or department manager. The amount of material you purchase should be carefully determined.
(2) Supplier search:
Purchasing departments need to find potential suppliers. Care must be taken when choosing the right supplier. Once the supplier has been identified, you will be asked to submit a quote or bid. You need to start bidding and select a supplier considering the conditions stated in the bid.
(3) Purchase order:
Once a supplier is selected, you need to pass the purchase order to the selected supplier. A copy of the purchase order should be sent to the original department, the accounting department, and one copy to the costing department.
(4) Receipt of materials:
The materials you receive must be entered in the receipt note and sent to the inspection department for inspection. After receiving the inspection report, the material is sent to the store and shipped to the manufacturing department.
To better understand the chart in this regard, it is shown below.
Receipt of goods:
The following chart shows the procedure for receiving and inspecting materials.
The warehousing department is usually located at the entrance of the factory. All carriers of goods are to report to this department. After receiving the delivery note or shipping advice from the supplier, the receiving department must arrange the unloading of the goods.
The receiving office must receive the goods after comparing the quantity, quality, and other details that should have been included in the purchase order. When you receive the item, you should check it by weighing, counting, or inspection.
If there is any damage or missing, you should state that fact on the carrier's copy or Challan. After being satisfied in all respects, the recipient of the goods must sign a copy of the carrier Challan. Next, you need to enter the item details on the receipt (below). The receipt memo is an important document and is required to confirm the supplier's invoice and pass it to payment.
The goods receipt note is prepared with an additional copy distributed as follows:
(I) To the purchasing department to update the purchase record.
(II) To the department that sent the purchase request.
(III) To the accounting and inventory management department.
(IV) To the shop owner. And
(V) Stored in the receiving department for records and future reference.
(VI) Goods receipt note (GRN):
This is a testimony of the goods received according to the purchase order. Otherwise, the supplier will be notified by formal contact. When making adjustments for damaged or defective items, it is customary to send a debit note to the supplier with the value of the damaged or rejected item and the shipping costs for the return.
Confirmation of purchase invoice:
Along with the goods, the supplier sends an invoice containing details of the materials supplied and their price.
The purchaser who receives the material should refer to the following document to verify the accuracy of the details.
(I) Order form.
(Ii) Receipt notes.
(Iii) Inspection report.
(IV) Debit notes (if any).
If the invoice is determined to be correct, it will be stamped with a rubber stamp by the responsible authority of the purchasing department and passed to the accounting department for payment. Invoices are now checked by an authorized person in the accounting department to ensure that the calculations are correct.
The invoice will be entered in the purchase diary that will be credited to the supplier's account. Periodically, the purchase journal totals are debited to the general ledger purchase account.
Goods receipt note (GRN) testimony of the goods received according to the purchase order
After the purchase, receipt and inspection of materials, the next most important step in the process of material control is concerned with’ the storage of materials which is termed as ‘storekeeping’. Storekeeping is that aspect of material control which is concerned with the physical storage of goods. For carrying the task of storekeeping, a separate stores department under the charge of a storekeeper is set up. The storekeeper should have the technical knowledge and experience in stores routine and the ability of organising various activities relating to the storage of goods, An efficient system of storekeeping should:
1) Ensure uninterrupted supply of materials and stores without delay to various production and service departments of the organisation.
2) Prevent overstocking and under stocking of materials.
3) Minimise the cost of storage.
4) Prevent all kids of stores from theft, deterioration, evaporation and pilferage. 5) Ensure an effective utilisation of available storage space and workers engaged in the process of storekeeping.
6) Develop a system of providing necessary information about the material items in the stores as and when required.
Functions of Storekeeping The following functions are performed by the stores department:
1) Receipt of material from the goods receiving department and ensuring that every Item of stores received by a storekeeper is duly supported by an indent, a purchase order, an inspection note and a goods received note.
2) Issue purchase requisition to the purchase department when the stock of material reaches the re-order level.
3) Maintain proper record of receipt, issue and balance of all items of materials, and check the bin card balances with the physical quantities in the bins.
4) Placing and arranging materials received at proper and appropriate places and adhering to the golden principle of storekeeping, i.e., a-place for everything and everything in its place.
5) Issue stores, against proper authorisation, in right quantity of right specification, and at the right time.
6) Minimising the storage handling and maintaining costs.
7) Ensuring that the stocks neither exceed the maximum leve1 nor go below the minimum level at any point of time.
8) Preventing the entry of unauthorised persons into the stores.
9) Co-ordination and supervision of staff in the stores department.
10) Carrying out a regular review of the items of stores in hand for locating slow moving and non-moving items so that the necessary steps may be taken for their disposal before they become obsolete.
Location and Lay-out of Stores
The location of stores department should be undertaken very carefully. The management should keep in mind various important considerations before selecting proper site for locating the stores department. It should be close to the receiving department so that the transportation charges can be minimised. At the same time, there should be an easy access to all other departments of the factory, roads, railways siding and wharf. Proper lay-out of stores is also of vital importance. Lay-out refers to the internal arrangement or placement of materials inside the stores. It aims at effective utilisation of space available for storage of materials. The stores should be divided into racks which should be sub-divided into small spaces. All these spaces are known as bins. For every kind of material, a bin is allotted. All bins should be serially numbered. The stores department should be equipped with racks, shelves, boxes crates, barrels, drums, cylinders and other receptacles for storing the different items. The receptacles should be arranged in such a way as to make the fullest utilisation of available space. At the same time, they should be easily accessible. Enough space should be provided for the movement of trucks, conveyors, lifts and other mechanical devices. A proper location and lay-out would ensure economy in materials handling, transportation costs, minimise wastage, ensure effective supervision and control.
Issue of Materials
All items in stores are meant issuance to various production departments. The procedure for the issue of material is normally laid down by the management. The storekeeper should not issue the materials unless a properly authorised material requisition is presented to him. The requisition is prepared by the foreman or the head of the department. It is prepared in triplicate; two copies are sent to the stores department and the third copy is retained by the requisitioning department for its own reference. On receipt of the materials requisition, the storekeeper issues the necessary materials against the signatures of the person receiving the materials. One of the copies of the materials requisition is used by the storekeeper for making the necessary entries in the bin card. The other copy is sent to the costing office for pricing the issues and making the necessary entries in the store’s ledger.
Issue of Materials # Basic Requirement:
Since large sums of money remain blocked in materials, it is essential for the custodian of materials to ensure that the issue of materials are made only under proper authorisation.
In fact, authorisation of stores is very vital.
Moreover, for efficient operation, the following points to be considered:
(a) Authorisation of issues
(b) Identification of requirements
(c) Timing of issues.
(a) Authorisation of Issues:
Since materials represents money, for the issue of materials there must be some authorisation by responsible officers nominated by the management. Such authorisation should be given clearly in the form of a directive circular.
The object is to avoid misunderstanding and unpleasantness that may arise due to the refusal by the storekeeper to issue materials. In many industries, the designation of the person authorised to draw materials along with their specimen signature are sent to the stores for verification.
The request for issue of materials is invariably made in written form or documents for proper authorisation. It is the primary responsibility of the storekeeper to verify all such documents for proper authorisation before the materials are issued.
Even though certain persons are authorised to draw goods from the stores, management normally imposes a few restrictions for drawl of the goods beyond a certain level of consumption. In all such cases, a clear directive must be given to the stores department.
(b) Identification of Requirement:
Largely due to ignorance, in several cases the correct description of the items is not given by the user department. Often the code number given may not tally with the description of the goods, and vice versa. Hence an experienced store-keeper should use his intelligence to identify the mistake and suggest to the indenter the correct item.
Details about materials requirements such as part number, code number, etc. ensure that it is supplied without delay and unnecessary correspondence.
(c) Timing of Issue:
The store’s manager should ensure that the indenting departments are fully aware of the timing of issues. However, there may be sudden rush during the peak hours. This may put undue pressure on the stores department and may lead to sudden stoppage of production, in case of undue delay.
So, our intelligent store-keeper should study carefully the requirements of various departments and stagger (spread) the timings in such a way that each department can draw their requirements without loss of time.
The important methods to follow in pricing material issuance are: -
1. Actual cost method
2. First-in first-out (FIFO) method
3. Last-in first-out (LIFO) method
4. Maximum first-in first-out method (HIFO) method
5. Simple average cost method
6. Weighted average cost method
7. Periodic average cost method
8. Standard Cost method
9. Exchange cost method
10. Last-in first-out (NIFO) method
11. Base stock method.
1. Actual cost method:
If you purchase a material specifically for a particular job, the actual cost of the material will be charged to that job. Such materials are usually kept separately and published only for that particular job.
2. First-in first-out (FIFO) method:
CIMA defines FIFO as "a method of setting the price of material issuance using the purchase price of the oldest unit in stock." With this method, the materials are issued out of stock in the order in which they were first stocked. It is assumed that the material that opens first is the material that is used first.
Advantage:
(A) Easy to understand and easy to price in question.
(B) It is a good store management practice to ensure that raw materials leave stores in chronological order based on age.
(C) This is an easy method with less administrative costs than other pricing methods.
(D) This inventory valuation method is accepted under standard accounting practices.
(E) Consistent and realistic practices in inventory and finished product valuation.
(F) Inventory is valued at the latest market price, close to the value based on replacement costs.
Cons: Disadvantages:
(A) If confused with other materials purchased at a different price at a later date, it is uncertain whether the material with the longest stock will be used.
(B) If the price of the purchased material fluctuates significantly, there will be more clerical work and errors may occur.
(C) Manufacturing costs are modest in situations where prices are rising.
(D) Inflationary markets tend to lower prices for key issues. The deflationary market tends to set higher prices for these issues.
(E) Generally, it is necessary to adopt multiple prices for the publication of a single document.
(F) This method makes it difficult to compare costs for different jobs when billed for the same material at different prices.
3. Last in first out (LIFO) method:
With this method, the latest purchase is issued first. Issues are priced on the latest batch you receive and will continue to be billed until the new batch you receive arrives in stock. This is a way to set the issue price of a material using the purchase price of the latest unit in stock.
Advantage:
(A) Shares issued at more recent prices represent the current market value based on exchange costs.
(B) Easy to understand and apply.
(C) Product costs tend to be more realistic as material costs are billed at more recent prices.
(D) When the price is rising, the issue pricing will be the more recent current market price.
(E) It tends to show modest profit figures by minimizing unrealized inventory gains and valuing inventory at its pre-price value, providing a hedge against inflation.
Cons: Disadvantages:
(A) Valuation of inventory in this way is not accepted in the creation of financial accounting.
(B) This is an assumption of a cash flow pattern and is not intended to represent the actual physical flow of material from the store.
(C) It may be necessary to adopt multiple prices for one problem.
(D) It becomes difficult to compare costs between jobs.
(E) It involves more clerical work and sometimes the evaluation may go wrong.
(F) During inflation, the valuation of inventory in this way does not represent the current market price.
4. Highest in first out (HIFO) method:
With this method, the most expensive material is published first, regardless of the date of purchase. The basic assumption is that in a fluctuating inflation market, material costs are quickly absorbed into product costs, hedging the risk of inflation. This method is used when the material is in short supply and when you are running a contract with costs. This method is uncommon and is not accepted by standard accounting practices.
5. Simple average cost method:
In this way, all the materials received are merged into the inventory of existing materials and their identities are lost. The simple average price is calculated regardless of the quantity involved. The simple average cost is obtained by dividing the number of batches and adding the various prices paid during the period to the batches purchased. For example, three batches of material received in Rs. 20, rupees 22 and Rs. 24 per unit each.
The simple average price is calculated as follows:
Rs. 20+ rupees 22+ rupees 24/3 batch = Rs. 36/3 batch = 22 rupees per unit
This method takes into account the prices of different batches, but is not common because it does not take into account the quantity purchased in different batches. Use this method when the price is less volatile and the stock price is small.
6. Weighted average cost method:
This is a permanent weighted averaging system in which the issue price is recalculated each time after each receipt, taking into account both the total quantity and the total cost when calculating the weighted average price. For example, three batches of material received in a quantity of 2,000 units @ Rs. 25, 2,300 units @ Rupee 26 and 800 units @ Rs. 24.24.
The weighted average price is calculated as follows:
(2,000 units x Rs .25) + (2,300 units x Rs .26) + (800 units x Rs .24) / 2,000 units + 2,300 units + 800 units
= Rs. 25,000+ rupees 20,800 + rupees 22,200 / 3,200 units = rupees 47,000 / 3,200 units = 25.26 per rupee unit
This method tends to smooth out price fluctuations and reduce the number of calculations because each issue is billed at the same price until you receive a new batch of material.
This method is easier than FIFO and LIFO because you do not have to identify each batch individually. However, this method adds more clerical work in calculating the new average price each time you receive a new batch. The calculated issue price rarely represents the actual purchase price.
7. Periodic average cost method:
With this method, instead of recalculating the simple or weighted average cost each time you have a receipt, the average for the entire accounting period is calculated.
The average price of all materials published during the period is calculated as follows:
8. Standard cost method:
In this way, important issues are priced at a given standard issue price. The difference between the actual purchase price and the standard issue price is amortized on the income statement. The standard cost is a predetermined cost set by management before the actual material cost is known, and the standard issue price is used for all issuance to production and valuation of final stock.
Careful setting of standard prices first significantly reduces all clerical work and errors and simplifies inventory recording procedures. Eliminating cost fluctuations due to material price fluctuations makes it easier to compare realistic manufacturing costs. This method is not suitable in situations where prices fluctuate.
9. Exchange fee method:
The replacement cost is the cost of replacing the same material by purchasing it on the pricing date of the material issue. It is different from the actual cost on the purchase date. The exchange price is the exchange price of the material at the time the material is issued or on the valuation date of the end-of-term inventory.
This method is unacceptable to standard accounting practices as it reflects costs that are not actually paid. If the shares are held at exchange costs and are purchased at a lower price for balance sheet purposes, an element of profit that has not yet been realized will be included in the income statement.
This method is advocated by charging the job or process for the market price of the material, making it easier to determine the profitability of the job or process. This method is especially suitable for inflationary trends in material market prices. Without the exact market for a particular material, it is difficult to ascertain the replacement price for a material problem.
10. Next Inn First Out (NIFO) Method:
This method is a variant of the exchange cost method. In this way, the price quoted in the latest purchase order or contract is used for all issuance until a new order is placed.
11. Basic stock method:
With this method, the specified quantity of material is always kept in stock and priced as a buffer or base stock at its original cost. In addition, issuance of materials that exceed the basic stock quantity is priced using one of the above methods.
This method shows how prices fluctuate over time. However, this method is uncommon and makes stock valuation completely unrealistic and is not accepted by standard accounting practices.
Accounting for Labour: Labour cost control procedure
Most companies are continually trying to improve efficiency. One-way companies analyse efficiency is to look at expenses such as salaries and decide whether to make changes. If a particular payroll calculation is not satisfactory, the company may change its policy.
About labour utilization
Labour costs are usually one of the biggest costs for a company, so most companies want to make sure that labour costs contribute to revenue generation. The direct labour utilization calculation shows what portion of total salary expenditure a company pays for direct work, that is, work directly related to income-generating projects. The remaining salary costs are usually indirect labour costs such as training, marketing, management, paid leave, and taxes.
Calculation
To calculate the direct labour utilization rate of salary, divide the amount of salary paid for direct labour by the total salary cost for the period. For example, if you spend $ 3,000 on salary during a payroll period, of which $ 2,000 is paid directly as labour costs, the direct labour utilization rate for that period is 66.7% ($ 2,000 / $ 3,000 = 66.7).
Interpretation
The direct labour utilization rate of most companies is about 65%. The higher the direct labour utilization rate of a company, the more efficient the company operates. Companies with a large amount of paid training and paid leave have lower rates of direct work than companies with less paid training and paid leave. These taxes have little effect on the interpretation of direct labour utilization, as all companies pay the same percentage of payroll tax.
Things to consider
Many companies directly monitor labour utilization on a monthly basis to assess the efficiency of their business operations. If the company determines that the utilization rate of direct labour is too low, it will make efforts to increase the ratio by reducing indirect labour costs. However, companies may try to reduce indirect labour costs as much as possible, and some of these costs are needed for successful business operations.
Direct and Indirect Labour
Classification of labour costs
Labour costs can be categorized as follows.
1. Direct labour costs
Direct labour costs are part of salary or wages and can be identified and billed by a single unit price of production.
Characteristics of direct labour costs:
Direct labour costs have the following characteristics.
- It has a direct relationship to the product, process, or cost unit.
- It can be measured quantitatively.
- A sufficient amount of material.
2. Indirect labour costs
Even if it occurs directly, it cannot be identified in the production of goods or services. These costs are incurred at the production site. Some cost centres may serve production departments or production activities. These cost centres are responsible for purchasing, engineering, and time management.
3. Manageable labour costs
Labour costs can be managed by managers during production and even when there is no production. Standard hours and hourly rates are fixed and workers can be required to complete a job or order within such time. That way, labour costs can be reduced to some extent.
4. Uncontrollable labour costs
Labour costs that management cannot easily control. Jobs and orders can be completed by a group of workers. The efficiency of such labour groups is inherently different. Workers can maximize their efficiency according to the general environment of the product location. If so, costs cannot be controlled by management.
Direct labour refers to salaries and wages paid to workers who are directly involved in the manufacture of a particular product or the implementation of a service. The work performed must be related to a particular task. In the business of providing services to customers, direct labour is the work performed by workers who provide services directly to customers, such as auditors, lawyers, and consultants.
Wages paid are considered indirect if the work performed is not associated with a particular employee. If you want to track the total costs incurred in a particular project, you need to add direct labour costs as they can make up the majority of the project.
How to measure direct labour
Direct work includes the cost of regular working hours and the cost of overtime hours. This includes related payroll taxes and expenses such as social security, Medicare, unemployment tax and worker employment insurance. Companies must include contributions to the pension plan as well as health insurance costs. Some companies may include employee training and development costs incurred during the hiring process.
When calculating labour costs directly, the company must include all cost items incurred in maintaining and hiring employees. In addition to what you pay your employees, the company must consider the costs of retaining employees, such as payroll tax burdens, insurance premiums, and benefits.
Most companies have standard hourly rates that estimate the expected direct labour costs under normal conditions. For example, suppose you have a direct labour cost of $ 10 per hour to assemble stroller seats, and your company expects to spend 0.5 hours assembling each car seat. If the company produces his 1,000 units, the standard direct labour cost would be $ 5,000 ($ 10 x 0.5 x $ 1,000).
What is Indirect labour?
Indirect labour costs are labour costs that are not directly related to the production of goods or the provision of services. This refers to the wages paid to workers who perform duties that allow others to produce goods and provide services.
Unlike direct labour costs, indirect labour costs are not easily associated with a particular unit. Employees in this group include managers and managers such as supervisors, accountants, security guards, and cleaners.
What is indirect labour?
The workforce is defined as the total workforce and expertise needed to complete a job. It can be divided into direct labour and indirect labour.
Overhead is a category of overhead and refers to employees who directly support overhead in performing their work. It is not directly involved in the service or production process.
Indirect labour cannot be traced back to a particular product or service, so the associated costs cannot be charged to the goods produced or the services provided. This represents the business overhead required to support operational levels.
What is an example of indirect labour?
Imagine you are the owner of a construction company. Consider both direct and indirect work when considering a contract. Direct labour costs are easy to understand. This refers to expenses, including wages and other benefits, incurred by employees directly engaged in projects such as workers, riggers, foreman and pipe fitters.
Indirect work refers to employees who are not involved in planning or construction projects. However, they are involved in running their day-to-day business. This includes human resources, management, accounting, customer service and more.
Examples of indirect labour include:
Computation of Labour cost
How to Calculate Labour Cost: Per Hour, Per Unit, Techniques and Formula
Techniques for managing labour costs can be effectively used by coordinating the activities of various labour-related departments.
(A) Human Resources Department
(B) Engineering and Operations Research Division
(C) Timekeeping department
(D) Payroll department and
(E) Cost accounting department.
The capabilities of these departments in reviewing and managing labour costs are described in detail below.
(A) Human Resources Department:
The Board of Directors has policies regarding recruitment, training, placement, transfer and promotion of employees. The Human Resources Manager of the Human Resources Department must implement these policies. The main functions of this department are recruitment, training, and placement of workers in the right jobs.
The Human Resources department recruits’ workers when it receives employee placement requests from various departments.
(B) Employee placement request:
This is a document initiated by a department that needs employees. Upon receipt of the job, the Human Resources Department will take action to appoint a worker by receiving the application, scrutinizing the application, interviewing the applicant, and finally selecting the appropriate candidate.
Key takeaways:
- Most companies are continually trying to improve efficiency. One-way companies analyse efficiency is to look at expenses such as salaries and decide whether to make changes.
- The direct labour utilization rate of most companies is about 65%.
- The higher the direct labour utilization rate of a company, the more efficient the company operates.
- Even if it occurs directly, it cannot be identified in the production of goods or services.
- Wages paid are considered indirect if the work performed is not associated with a particular employee.
- Indirect labour costs are labour costs that are not directly related to the production of goods or the provision of services.
Labour turnover rate:
Labour turnover can be defined as the number of workers replaced during a particular period relative to the average workforce during the period. This is the number of workers who quit their jobs during the period relative to the average workforce during the period. It is a factor that affects labour efficiency and thus labour costs.
Definition: Turnover can be defined as the overall change in the number of people employed by an entity during a particular time period. This takes into account the number of employees leaving, new subscribers, and the total number of employees listed on salary at the end of a given period.
High turnover rates are considered unfavourable for organizational stability and can even lead to temporary closures and strikes. Therefore, entities take human resources as an integral part of their business. It means the rate of change in the composition of the workforce.
There are three ways to measure it:
- Calculating Labour Turnover by Separation Method
Labour Turnover = No. of workers left or separated during a period / Average number of workers on role during that period x 100
Average No. Of. Workers = (No. Of workers at the beginning of the period + No. Of workers at the end of the period) / 2
2. Calculating Labour Turnover by Replacement Method
Labour Turnover = No. Of workers replaced during a period / Average number of workers on role during that period x 100
3. Calculating Labour Turnover by Flux Method
Labour Turnover = No. Of workers separated in a period + No. Of workers replaced in the same period) / Average number of workers on role during that period x100
Turnover rate due to new hires: Workers who participate in a business to expand their business do not generate a turnover rate. Some cost activists believe that newly hired workers are responsible for changes in the composition of the workforce. The turnover rate of new workers is as follows.
- A high turnover rate is bad because it indicates that the worker will not stay long. When they go, they bring their experience with them. New workers must be engaged and trained. Aside from the cost of hiring and training new workers, their quality is expected to decline. Therefore, the turnover rate of workers is very costly for employers, but when workers take a break from work or get a job that is not suitable for them, they also lose.
- Both worker turnovers and shifts are costly, but most of the turnover costs usually occur during shifts. Separation is the cause of sales and the exchange continues.
- There is a certain amount of irreducible turnover due to illness, death, retirement, or marriage of female workers. However, research shows that actual sales are unnecessarily high in most industries.
Causes of turnover:
Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions, bad treatment on the part of employers, or simply the raging nature of workers. Therefore, the cause may be unavoidable.
The avoidable causes of turnover are:
(1) Redundancy due to seasonal fluctuations, material shortages, project completion, etc. The efficiency and foresight of senior management can eliminate sales from these causes.
(2) Boring work
(3) Bad working conditions
(4) Low wages
(5) Unstable employment
(6) There are few opportunities for promotion
(7) Unfair treatment
(8) Labour dispute.
The unavoidable causes are as follows:
(1) Difficulty of housing
(2) Personal improvement
(3) Domestic responsibility
(4) Illness and accident
(5) Leave the district
(6) Discharged because it was judged to be inappropriate
(7) Discharge due to disciplinary action
(8) Retirement
(9) Death.
Employers can significantly reduce worker turnover, thereby saving labor costs.
Labour turnover cost:
It is a good idea to calculate the labour turnover cost individually.
It consists of:
(A) Recruitment costs for additional men engaged due to excessive turnover.
(B) Training costs for additional men engaged. And
(C) Loss due to reduced production quantity and quality due to sales, represented by lack of recovery of hourly wages and fixed costs.
(D) Costs of lost time, wasted, scrap, defective work and tools, and machine damage due to inefficiencies of new employers.
(E) Cost of products lost due to delayed acquisition of new workforce.
(F) Frequency of accidents due to lack of experience of new employees.
Impact on labour turnover
When an employee leaves the organization, it affects the work of some or even the entire entity.
This effect can be both constructive and destructive to the organization. When workers leave the company in groups, the impact is even greater and productivity is reduced.
Harmful effects
First, let's talk about the negative effects of turnover within an organization.
- Impede productivity: When an employee quits a job, production is temporarily stopped or slowed down until a new employer joins the organization.
- Demoralization: Colleagues lose motivation when they find that a retired employee is retiring for a better opportunity.
- Increased production costs: During the training or learning phase of a new employee, the cost increases due to reduced productivity and high waste.
- Training Costs: Wages paid to trainees, new employees, and mentors during unproductive training periods are a significant expense to the organization.
- Replenishment Costs: Recruiting new staff to fill the position of retired employees includes advertising, employment, and training costs.
Positive effect
Labour turnover also has several benefits for the organization. This is explained in detail below.
- Improve your organizational culture: Turnover means the entry of new people with different values, ideas and beliefs to enrich your organizational culture.
- More talented people: new hires are more efficient, knowledgeable, sensitive and active than existing employees.
- Cheaper Resources: Due to continuous price increases and promotions, existing workers will cost more than alternative cheap trainees.
- Injecting Fresh Ideas: New resources bring innovative ideas and ways of doing things. This is very beneficial to the organization.
- Better Skills and Qualifications: Evolving courses and skill training allow organizations to acquire new graduates with better abilities.
Types of turnovers
Turnover can be distinguished based on employee spontaneity and its impact on the organization. Below are four basic types of her.
- Voluntary: When an employee voluntarily leaves the organization, that is, when the person resigns from work for some reason, it is called voluntary turnover.
- Involuntary: In the case of involuntary turnover, the worker is excluded from the job by management. It may be due to reasons such as non-compliance with the norms.
- Functional: Being functional means improving the efficiency of your organization.
- Dysfunction: Dysfunctional labour shifts occur when highly efficient and skilled employees quit their jobs by interfering with the overall functioning of the organization.
Strategy to reduce turnover
Turnover is an unavoidable aspect of business. However, you can control it by taking timely actions and improving existing HR policies.
Let's look at other ways to reduce the number of exits.
Management must make constant efforts to promote good relationships with healthy employees within the organization. Wage and incentive plans should be reviewed and upgraded annually to ensure fair wages for workers.
Another way is to change your personnel policy according to the guidelines set by government and corporate behaviour. In addition to fair wages, we can maintain employee employment by providing a variety of incidental benefits such as insurance, medical facilities and transportation.
Retirement interviews provide a definitive reason for turnover, so do it to get an idea of all the things you need to improve. Workplace facilities such as adequate ventilation, lighting, drinking water and cleanliness must be maintained.
Organizations should not underestimate labour welfare and take appropriate steps to empower their talent. Corporate compensation and compensation planning must be progressive to motivate and evaluate talented employees.
Ground-level employee ideas can prove beneficial to the organization. Therefore, they should be encouraged to share their views. Resolving conflicts and addressing the dissatisfaction and problems of workers in the workplace creates a healthy environment for all.
Managers and supervisors need to be open-minded about their subordinates in order to deepen their ties and understanding. All employees are looking forward to the growth prospects that the organization offers. Therefore, it is very advantageous to give employees the opportunity to be promoted.
Conclusion
Turnover is usually high in private organizations where many workers engage in day-to-day tasks that do not require expertise.
However, skill-based organizations are trying to maintain low turnover rates. This is because if their valuable resources leave the company, they will have to bear the cost of fairly high sales.
Although a small factor, employees tend to stay in the organization for longer if the employee orientation process is prominent.
Key takeaways:
- Labour turnover can be defined as the number of workers replaced during a particular period relative to the average workforce during the period.
- Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions.
- Employers can significantly reduce worker turnover, thereby saving labour costs.
- When an employee leaves the organization, it affects the work of some or even the entire entity.
- Turnover is usually high in private organizations where many workers engage in day-to-day tasks that do not require expertise
- Management must make constant efforts to promote good relationships with healthy employees within the organization.
- Wage and incentive plans should be reviewed and upgraded annually to ensure fair wages for workers.
- Turnover can be distinguished based on employee spontaneity and its impact on the organization.
- Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions, bad treatment on the part of employers, or simply the raging nature of workers.
- There is a certain amount of irreducible turnover due to illness, death, retirement, or marriage of female workers.
It is a type of non-monetary benefits provided by employer to employee. Fringe benefits are those expenses which are spent by an employer against the individual employees for their welfare. Normally such expenses do not form a part of their pay packet, e.g., ESI contribution made by an employer. Such expenses may be recovered separately as a percentage on labour cost or at an hourly rate. Alternatively, those may be treated as overheads and apportioned to cost centres on the basis of wages/salary cost.
References:
- Arora M.N: Cost Accounting - Principles and Practice; Vikas, New Delhi.
- Jain S.P. And Narang K.L: Cost Accounting; Kalyani New Delhi.
- Anthony Robert, Reece, etal: Principles of Management Accounting; Richard D. Irwin Inc. Illinois.
