Labour is also one of
the prime inputs of the production system. All manufacturing concerns require
the labor for carrying out their production activities. The labor consists of
workers who are essential to convert materials into finished products. Labour
can be either direct or indirect. The first and foremost thing is to pay the
demanded amount by laborers. Dissatisfaction and discontented labor always
result in high labor costs and low-quality outputs.
MEANING AND DEFINITION
OF LABOUR COST
Labour is human
resources and participates in the process of production. It is an essential
factor of production. The amount, which is paid to the labor, is known as labor
cost and it is a significant element of the cost of a product. Labor cost
includes monetary benefit e.g basic wages and fringe benefits such as flooding,
housing, education to the children of workers, holiday pay, medical facilities,
etc.
In other words, labor
cost is the amount of remuneration paid to a worker or an employee for his work
or service in producing goods and services.
Types of labor cost
Direct cost
The cost that is
easily identified and varies with the level of production. Direct cost is that
labors, which can be easy, identified with the specified product, job, or work
order. It includes all labor engaged in converting raw materials into finished
goods or in altering two forms of labor which are incurred wholly or specifically
for any particular job or work order.
For example: carpenter in
furniture house, tailors in the garments industry, washer in the dry clinic,
etc. Remuneration paid to direct labor is termed as direct labor cost. It is
treated as part of the prime cost.
Indirect cost
The cost, which is not
easily identified and does not vary with the level of production. It is that
labor which cannot be easily identified with a specific product or job. It
includes all labor indirectly involved in converting raw materials into
finished goods or in altering the construction, consumption, or condition of
the product.
For example: labor
employed in repair and maintenance, timekeeping, cost accounting, store
department, etc. Remuneration paid to indirect labor is termed as indirect
labor cost and it is treated as part of overheads. Payments made to the
sweepers, watchmen, cleaners, supervisors, and accounting personnel are
examples of indirect costs.
Importance of labor
cost
Labor cost is a main
element of cost, which covers one of the major portions of the total cost of a
product or job.
o It is more difficult
to control as compared to material cost due to the involvement of the human
element.
o It is affected due to
a change in government policy and the requirement of trade unions.
o It is adversely
affected due to dissatisfaction, irregularity, inefficiency, idle time, and
high labour of the workers.
o It is important from
the fact that the direct labor cost is taken as the basis for estimating the
amount of factory overheads while determining the product cost.
Labour cost control
Labour cost is an
element of the cost of production. It may be excessive due to various reasons
such as lack of supervision on the labours, high labour turnover, inefficiency
of labour etc. Reducing the cost of production, an optimum utilization of
labours is needed for each and individual firm. Therefore, labour cost control
refers to the system that ensures effective employment and proper utilization
of labours.
Management is concerned
with controlling labour cost. Labour cost control involves such systems,
procedures, techniques and tools used by the management in order to keep the
labour cost of the product or job as minimum as possible.
The need of labour
cost control arises to fulfill the following purposes:
o To obtain a better quality
output with the least effort and time of the workers.
o To reduce the cost of
production of the products manufactures or services rendered.
o To ensure the
satisfaction of the workers by creating a good working environment in the factory.
o To adopt a fair system
of wage payment and to minimize labour turnover.
o To minimize wastage of
materials by workers, idle time, and unusual overtime work.
o To maintain a safe
environment.
o To increase the
profitability and competitiveness of the organization.
Departments involved
in controlling labour cost
In a large
manufacturing concern, the following department is set up for proper accounting
and controlling of labour cost:
Personnel department
The personnel department
is concerned with the recruiting, training, placing, and promoting the workers
for the jobs to which they are best suited. It executes the employee's policies
laid down by the board of directors of the company. It keeps complete records
of the employees and reports to the management regarding labour utilisation,
labour efficiency, labour turnover, and absenteeism.
The personnel
department starts the recruitment of workers immediately after receiving the
labour requisition from the concerned departments. The labour requisition is
also known as employee requisition or employee placement requisition. The personnel
department keeps complete records of each employee working in the organization
in a card known as the employee's history card.
The main functions of the
personnel department are as follows:
1. Selection and
recruitment of required labour.
2. Conduct a training
program for employees.
3. Maintaining services
and leave records to employees.
4. Preparation and
submission of various reports to concerned authorities.
Engineering department
The engineering
department involves preparing plans and specifications for each job. This
department is established with the view of determining the production procedure
and working technique and creating the sound working conditions for each
worker. It inspects the jobs being done at different production stages to
ensure that they are being done as per plans and specifications.
Its main functions are
as follows:
1. Making job analysis.
2. Setting piece rate.
3. Preparing the performance
evaluation.
4. Creation of a safe
environment to minimize the risk of an accident.
5. Preparing of plans.
Time and motion study
department
This department
works properly coordinating with personnel, engineering, and cost department.
This department performs the following functions of the making of time and motion
studies of labour.
Motion study
A worker or a machine
makes various moments of the part of his body while performing a job or work.
It is a study of moments of workers in performing a job or work for the propose
of eliminating useless, ill-directed, and inefficient motions to improve
productivity. It is conducted while the worker in the job. Motion study is also
known as a methods study because its main objectives are to find out the best
method of completing the job.
Time study
It is conducted after
the motion study. The main objective of the time study is to determine the
required time for performing the job or work. Various methods are used for the
determination of basic time. Standard or basic time is fixed for a job or
operation providing allowances to the worker for drinking water, smoking, and
other so on selecting an average worker as a model rather than exceptionally
fast or slow workers.
Main functions of the time
and motion study department are ;
1. To divide a given job
into detailed elements or parts.
2. To make a study of the
movements of a worker while performing each element of the job.
3. To determine and
eliminate unnecessary or wasteful motions or movements.
4. To observe and record
the time required for each necessary movement and to fix the standard time
required to complete a given job.
5. To set a reasonable
piece rate for a different job.
Time-keeping
department
This department is
related to the recording of the time of each worker engaged in the factory to
know the attendance and ascertainment of wages. The main objective of this
department is to prepare to payroll, meeting the statutory requirements,
maintaining discipline in attendance, recording of each worker's time 'in' and
'out' of the factory making a distinction between normal time. Over time, late
attendance and early leaving and to provide a basis for the distribution of
overheads when overheads are absorbed based on labour hours.
To record the time of
each worker properly, either an attendance register or a time card can be used.
Time booking
It is concerned with
recording the time spent by each worker in the factory on different jobs is
work orders. It determines the exact time spent by the worker in different
departments or processes or products or jobs to calculate the correct amount of
labour cost. When the workers spend his time on several jobs or work orders
then the need of time booking arises for the purpose of cost analysis and
apportionment.
The following forms are
used for time booking:
Daily timesheet: it is given for
each worker to record the details of time spent daily on different jobs.
Weekly timesheet: It
is similar to the daily timesheet which records the details of time sent by a
worker in a week on different jobs or work orders. It is an improvement over
the daily timesheet because each worker is given a single sheet for a week to
record his time.
Job card: It is used to
keep the correct record of the time spent by each worker on each job. It helps
to calculate the labour cost of a job accurately ad conveniently. The card can
be used for each worker or for each job as per the need of the factory.
Piece work card: It is used to record
the quantity of output produced by a worker along with the time spent by him.
It is issued to each worker when the wages are payable on piece-rate basis.
Idle time card: It records the time
wasted by each worker. It is the difference between the time booked to
different jobs and the gate time. It shows the reasons for not doing work while
the workers remain present in the factory.
The main functions of time keeping department are:
1. To keep an attendance
record of each worker showing arrival time, departure time, and overtime.
2. To keep an accurate
record of time spent by each worker in the factory for calculating wages.
3. To maintain the discipline
to ensure the regular attendance of the workers.
4. To record and
determine the exact time spent by the workers on different jobs or work orders
for calculating the correct amount of labour cost,
5. To ascertain the
unproductive or idle time of each worker and to minimize it.
Pay-roll department
The pay-roll department
involves verifying the time of the workers, calculating wages due to each
worker, and preparing the payroll or wage sheet. It prepares the payroll or
wage sheet for each department separately and distributes wages and salaries to
the workers.
Payslip
It is prepared for
each worker showing the net payable amount of wages. Payroll is prepared for
each department but payslip is prepared for each worker. Payslips of a worker
is a copy of the payroll.
The main functions of
the payroll department are as follows:
1. To keep the records of
the workers, departments, jobs, and wages rate of each worker.
2. To verify and
summarise the time of each worker as shown on the Time Card.
3. It should provide more
wages for efficient and skilled workers.
4. It should follow
government policy and trade unions' norms.
5. It should be simple
and understandable to all the workers.
6. It should help in
improving the performance and productivity of the workers.
7. It should be flexible
enough to suit the needs of an organization.
Cost accounting
department
The cost accounting
department involves determining the labour cost of each product, process, and
job. It collects, records, classifies, and analyses the labor cost.
The functions of an
accounting department are;
1. To collect, record,
and classify the labour cost.
2. To analyze, allocate,
and apportion the labour costs of different products or jobs.
3. To determine the
correct amount of labour cost, process, job.
4. To supply information regarding
labour cost through cost reports to the management
5. when required.
System of wage payment
The system of wages
payment is the method adopted by manufacturing concerns to remunerate workers.
It is the way of giving financial compensation to the workers for the time and
efforts invested by them in converting materials into finished products.
It is important
because of the following reasons;
1. It facilitates the
preparation of a wage plan for the future.
2. It helps to determine
the cost of production and the profitability of the organizations.
3. It determines the
amount of earning of the workers and their living standards.
4. It affects the
interest and attitude of the workers.
Essential criteria of
a good wage system
1. It should be fair and
justifiable to the workers and the organisation.
2. It should help in
maximizing workers' satisfaction and minimizing labour turnover.
3. It should assure
minimum guaranteed wages to all workers.
4. It should assure equal
pay for equal work.
Piece rate system of
wage payment
Meaning
The piece is that
system of wages payment in which the workers are paid on the basis of the units
of output produced. It does not consider the time spent by the workers. It is a
method of remunerating the workers according to the number of units produced or
the job completed. It is also known as payment by result or output. It pays
wages at a fixed piece rate for each unit of output produced.
It is calculated by,
Total wages earned =
output * Piece rate
Advantage
o It pays wages
according to the output produced by the workers.
o It helps to reduce
idle time.
o It gives incentive to
the workers to adopt a better method of production for increasing their
production and earning.
o It helps the
management to determine the exact labour cost per unit for submitting a quotation.
o It reduces per-unit
cost of production due to increased volume of production.
o It requires less
supervision costs.
Disadvantages
o It does not help in
producing quality output as the workers are concentrated more on quantity
instead of quality.
o It does not help for a
uniform flow of production and makes it difficult to regulate the production schedule.
o It is very difficult
to fix an acceptable and reasonable piece rate for each item of output or job.
o It creates greater
chances of ineffective use of materials, tools, and equipment due to more
concentration on increasing output.
o It may adversely affect
the worker's health as well.
o It requires extra
supervision cost for quality output and effective use of materials, tools, and
equipment.
TIME RATE SYSTEM OF
WAGE PAYMENT
Meaning
The time rate is the
system of wages payment in which the workers are paid on the basis of time
spent by them in the factory. Under this system, the workers and employees are
paid wages on the basis of the time they have worked rather than the volume of
output they have produced. Hence, according to this system, wages are paid on an
hourly, weekly or monthly basis. Under it, the wages earned by a worker is
determined by using the following formula;
Wages earned = hours
spent * wages rate per hour
Advantages:
o It is simple to understand
and easy to calculate.
o It is quite useful for
organizations that use costly inputs for quality outputs.
o It is beneficial for
average and below-average workers.
o It assures regular
income and creates a feeling of economic security among the workers.
o It does not
discriminate against the workers and is preferred by trade unions.
Disadvantages:
o It does not help in
increasing output and improving as there is no correlation between effort and
reward.
o It is not justifiable
to differentiate between efficient and inefficient workers and skilled and unskilled
workers.
o It pays for idle time,
which increases the cost of production.
o It encourages a go-slow
tendency among workers during working hours and encourages them to work
overtime.
o It is difficult to
estimate the exact labour cost in advance.
Differences between
piece rate and time rate system
|
Piece rate system |
Time rate system |
|
Piece
rate system is a method of wage payment to workers based in the quantity of
output they have produced |
Time
rate system is a method of wage payment to workers based on time spent by
them for the production of output. |
|
It pays the workers according to
the units of output produced. |
It pays the work according to the
time spent in the factory. |
|
It
does not pay for idle time. |
It
pays for idle time. |
|
It requires strict supervision to
get the required quality output. |
It requires strict supervision to
get the required quantity of output. |
|
It
helps to fix per unit labour cost in advance. |
It
does not fix labour cost per unit in advance. |
|
It does not bring uniformity in
the flow of production and causes an excessive wastage of inputs. |
It helps maintain a uniform flow
of production and ensures an efficient use of materials, tools and equipment. |
INTERNAL CONTROL OF
WAGE PAYMENT
Wages are one of the
major portions of the total cost of production. There is always a chance of
fraud in wage payment. Therefore, an effective administrative and accounting
control system must be implemented by the management to minimize fraud and to
keep the labour cost minim in. The management should evaluate and revise its
controlling system to find out leakage and to stop leakages in time.
The following are the
steps to minimize fraud in wage payment:
1. The time of the job
card and idle card should be compared with the time shown by the time card.
2. The wages sheet should
be prepared by involving two or more than two responsible employees.
3. The organization should
issue identity cards to all the workers for their identification.
4. The payroll or wage
sheet should be prepared for each department separately and wages should be
distributed in the presence of the concerned authority of the department.
5. The cashier should not
be allowed to involve in the preparation of the wage sheet.
6. The cashier should be
allowed to draw only the net amount of wages as per wage sheet from the bank in
the required denominations of notes.
Reviewed by Bijay Munikar
on
March 15, 2021
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