Unit 3
LABOUR COSTING
Labour is an essential factor of production. It is a human resource and participates in the process of production. Wages paid to labour is a significant item of cost. The labour cost should be distinguished between direct and indirect labour. Direct labour cost can be identified with and charged directly to the product or a job whereas, indirect labour cost is not so identifiable and, therefore, it is included in overheads which may be allocated to different products or department on some suitable basis. Cost accounting for labour has three primary objectives:
- Determining labour costs in the cost of product or service
- Reporting labour costs for planning and control and
- Reporting labour costs for decision-making.
Labour cost is an important part of total cost of production. Therefore, there is a need for effective control over labour and labour–related costs. Various departments contribute to the efficient utilisation of labour and adequate control over costs. Personnel department has to provide an efficient labour force. The engineering department maintains control over working conditions and production methods for each job and department or process by preparing plans and specifications. Time-keeping department maintains an accurate record of the time spent by each employee. Preparation of the pay roll from the clock cards, job or time tickers or time sheets is done by the pay roll department. The Cost Accounting department is responsible for the accumulation and classification of all data of which labour costs are one of the most important items.
As the labour costs constitute a significant portion of the total cost of a product, proper recording of time and collection of cost data are pre-requisites of any system of labour cost control. Timekeeping is a system of recording the time of arrival and departure of workers. It provides a record of total time spent by the workers in the factory. In addition to recording of time of arrival and departure of workers it is also necessary to record time spent by workers on each job, order or process which is known as time booking. The system of time booking may be maintained either manually or mechanically. Time recording clocks may be used to enter the time of starting and finishing each job separately on the job cards. Time booking can be made with daily time sheets; weekly time sheets or job cards.
Job card is issued to each worker for job at the beginning of each day or week depending upon the number of job he has to work on. It gives complete record of the time spent by each worker on different jobs during a particular period.
Every organization has to maintain a system of payroll accounting for the purpose of computing wages payable to workers. The work involves the calculation of wages, deductions, net wages payable to employees etc. The gross wages payable to each worker are computed with the help of time card, job card or piece work card. Certain statutory deductions are also made from the gross wages. The wage sheet is prepared showing the gross wages, deductions and net wages payable to workers. It is prepared at periodical intervals according to the time of wage payment. Normally, wage sheet is prepared separately for department. But this wage sheet should be checked properly to minimize the possibilities of wrong payments either deliberately or inadvertently. Detection and prevention of both errors and frauds, including the checking for dummy workers in wage sheet, need attention to ensure accuracy in wage payments.
Idle time is a period or duration for which workers are paid but they have not worked for production in the factory. When workers are paid on time basis, some difference between the time for which they actually spend upon production is bound to arise. Idle time does not include holidays, leave etc. It may be normal in nature or abnormal. Normal idle time is that idle time which is unavoidable; it is of normal nature and is inherent in a production or work environment. Normal idle time is caused due to the movement of workers. Abnormal idle time is that time which is not caused by the usual routine of production. The time wasted by the workers may represent abnormal idle time. The loss incurred by abnormal conditions cannot be considered as part of the cost of the product and should be transferred to the Costing Profit and Loss A/c. For example, time lost due to break down of machinery, lack of materials, strikes, lock out etc.
Overtime is the time put in by the workers and work done by them beyond normal hours of work. It is an extra time over and above the schedule hours of work.
Factories Act, 1948, provides that every worker is to be paid overtime at a higher rate, normally at double the normal wage rate, if he is called overtime to work more than 8 hours a day. The excess over normal wage rate is called overtime premium. Overtime may be considered useful when there is urgency, company needs extra production or when the workers are less than the required number.
In cost accounting, overtime premium should be separated from regular earning and charged as follows; -
Nature of Overtime Charged to
Customers request to complete the job early Job directly
General pressure of work General Overhead
Delayed Schedule Department
Unavoidable Reasons Costing P & L A/c
Seasonal rush and peak load Prime cost
Overtime payments made to workers engaged in direct labour are treated as direct cost and overtime payments made to indirect labour are treated as part of factory overheads.
One of the important components of Labour Cost Control is the wages system. A system of wage payment, which takes care of both, i.e. providing guarantee of minimum wages as well as offering incentive to efficient workers helps to motivate the workers to a great extent. It should also be remembered that high wages do not necessarily mean high labour cost because it may be observed that due to high wages the productivity of workers is also high and hence the per unit cost of production is actually decreased. On the other hand, if low wages are paid, it may result in lower productivity and hence higher wages do not necessarily mean high cost.
- Time Rate Method
Time Rate at Ordinary Levels
Under this method, rate of payment of wages per hour is fixed and payment is made accordingly on the basis of time worked irrespective of the output produced. However, overtime is paid as per the statutory provisions. The main benefit of this method for the workers is that they get guarantee of minimum income irrespective of the output produced by them. If a worker is not able to work due to genuine reasons like illness or physical disability, he will continue to get the wages on the basis of time taken for a particular job. This method is used in the following situation: -
(a) Where the work requires high skill and quality is more important than the quantity.
(b) Where the output/services is not quantifiable, i.e. where the output/services cannot be measured.
(c) Where the work done by one person is dependent upon other person, in other words where an individual worker has no control over the work.
(d) Where the speed of production is governed by time in process or speed of a machine.
(e) Where the workers are learners or inexperienced.
(f) Where continuous supervision is not possible.
The main advantage of this method is that the worker is assured of minimum income irrespective of the output produced. He can focus on quality as there is no monetary incentive for producing more output. However, the main limitation of this method is that it does not offer any incentive to the efficient workers. Efficient and inefficient workers are paid at the same rate of wages and hence there is a possibility that even an efficient worker may become inefficient due to lack of incentive.
Time Rate at High Wage Levels
This system is a variation of time rate at ordinary levels in the sense that in this system, workers are paid at time rate but the rate is much higher than that is normally paid in the industry or area. In this method, the workers are paid according to the time taken and overtime is not normally allowed. This method offers a very strong incentive to workers and it can attract talented workers in the industry. However, care should be taken that productivity also increases; otherwise the cost will go on increasing.
Graduated Time Rate
Under this method payment is made at time rate, which varies according to personal qualities of the workers. The rate also changes with the official cost of living index.
Thus this method is suitable for both employer and employees.
B. Piece Rate Method
This method is also called as payment by results where the workers are paid as per the production achieved by them. Thus if a worker produces higher output, he can earn higher wages. Under the piece rate system of wage payment, the workers receive a flat rate of wages either for time worked or for units manufactured.
The advantages of such a system are summarized below: -
(a) As the workers are paid on the basis of the results, i.e., for each unit produced, job performed or number of operations completed, there is a tendency on their part to increase their production so that they may earn more wages.
(b) The increased production thus achieved results in the reduction of overhead expenses per unit of production even through total overheads may increase. The increase in overheads will be relatively small as compared to the increase in turnover.
(c) The wages being paid on the basis of production; the management know the labour cost per unit or per job.
(d) The workers are rewarded for their efficiency because the inefficient workers will not get as much as the efficient workers.
(e) The workers are very careful in handling their tools and machinery, etc., because on the proper maintenance of these depends their higher efficiency and in turn, their higher wages.
(f) This method is very simple to operate.
The Disadvantages on the other hand are as follows: -
(a) It is not easy to determine the piece work rate on an equitable basis. When a rate has been fixed and later on it is found to be too high, it is very difficult to reduce it as its reduction will cause dissatisfaction and friction among the workers.
(b) As the labour cost per unit remains the same, the employees do not gain as a result of increase in productivity except to some extent in the form of reduction in overheads. As such if the overhead expenses per unit are relatively small, the advantage to the employer will not be significant.
(c) Sometimes quantity may increase at the cost of quality. For the reason, a strict inspection has to be maintained in the form of quality control. This will result into additional expenditure.
(d) Materials may be used in excessive quantities and may be handed carelessly on account of the workers’ efforts to achieve high output.
(e) This method may cause discontentment amongst those who are slow and those who are paid on time basis.
(f) The workers may in an attempt to increase production, handle the machines carelessly causing major damage or breakdown.
The following are the variations of this method.
Straight Piece Rate
In this method, rate per unit is fixed and the worker is paid according to this rate. For example, if the rate per unit is fixed at Rs 10, and the output produced is 300 units, the remuneration to the worker will be Rs 10 X 300 units = Rs 3, 000. This method thus offers a very strong incentive to the workers and is particularly suitable where the work is repetitive. The benefits of this method are as follows: -
(a) The method is simple and provides a very strong incentive to the workers by linking the monetary reward directly to the results.
(b) Productivity can be increased substantially if the rate of pay includes a really adequate incentive.
(c) Higher productivity will result in lowering the cost per unit.
However, the main limitation of this method is that if a worker is not able to work efficiently due to reasons beyond his control, he will be penalized in the form of lower wages.
Differential Piece Rates
Under these methods, the rate per standard hour of production is increased as the output level rises. The increase in rates may be proportionate to the increase in output or proportionately more or less than that as may be decided. In other words, a worker is paid higher wages for higher productivity as an incentive. The rate per unit will be higher in this case as compared to the rate paid to a worker with lower productivity. For deciding the efficiency, comparison is made between the standard production and actual production of the worker. If the actual production is more, the worker qualifies for higher rate of wages. The Differential Piece Rate methods will be useful when the production is of repetitive type, methods of production are standardized and the output can be identified with individual workers. The following are the major systems of differential piece rate system: -
(i) Taylor (ii) Merrick (iii) Gantt Task and Bonus.
C. Individual Bonus Plans:
We have seen earlier that in the time rate system, the workers are paid according to the time taken while in case of piece rate system, the output produced by the worker decides his wages as rate per unit is fixed rather than rate per hour. In the premium bonus plan, the gain arising out of increased productivity is shared by both, the employer and employee.
The bonus to be paid to the workers is computed on the basis of savings in the hours, i.e. the difference between the time allowed and time taken. The time allowed is the standard time, which is fixed by conducting a time and motion study by the work-study engineers. While fixing the standard time, due allowance is given for physical and mental fatigue as well as for normal idle time. The actual time taken is compared with this standard time and bonus is payable to the worker if the time taken is less than the standard time.
The individual bonus schemes commonly used are as follows:
- Halsey Premium Plan
This plan was introduced by F.A. Halsey, an American engineer. In this plan, bonus is paid on the basis of time saved. Standard time is fixed for a job and if the actual time taken is less than the same, the worker becomes eligible for bonus. However, bonus is paid equal to wages of 50% of the time saved. A worker is assured of time wages if he takes longer time than the allowed time. The formula for computing the total wages is as follows.
Total Earnings = H X R + 50% [S – H] R
Where, H = Hours worked, R = Rate per hour, S = Standard time
b. Rowan Plan
This premium bonus plan was introduced by Mr. James Rowan. It is similar to that of Halsey Plan in respect of time saved, but bonus hours are calculated as the proportion of the time taken which the time saved bears to the time allowed and they are paid for at time rate. The formula for computation of total earnings is as follows: -
Total Earnings = H × R + [S – H]/S × H × R
Where H = Hours worked, R = Rate per hour, S = Standard time
