Chapter 4-Labour Costs

CHAPTER 04:
LABOUR COSTS
CONDUCTED BY:
P. Ayanthi Madumali
Intended Learning Outcomes
• At the end of the chapter, you will able to
1.Distinguish between the direct and indirect labor cost
2. Understand the various facets of labor cost control
3. Understand the concepts like labor turnover, time keeping, time booking
and idle and overtime
4. Know the various methods of remuneration including incentive plans
5. Understand the pay roll accounting and disbursement of wages.

Labour
• This is the cost, incurred in the form of remuneration paid to the
employees or labour of the organization. The workforce required
to convert material into finished product is called labour. It can be
direct or indirect.
• Direct Labour
• The portion of wages and salaries which can be identified and
charged to a single cost unit
• Indirect Labour
• Cannot be directly related with the production of specific goods or
service. Ex: Foreman, storekeeper, time keeeper etc.
Departments involved in labor cost control and
reduction
I. Personnel Department
II. Engineering Department
III.Time Keeping Department
IV. Payroll Department
V. Cost Accounting Department

Records regarding Labour costs
1. Time Keeping records
• In time keeping system, maintaining record of each worker’s
time in and time out during regular working period .In this basic
aim is responsible for recording the attendance time of each
worker accurately.
• Methods of time keeping:

• Clock cards
• Disc Method
• Attendance Records
2. Time Booking records
• In time keeping system ,maintain the records of each worker’s
productive time spent by the workers in the factory.
• Methods of Time Booking :

• Daily Time Sheet
• Weekly Time Sheets
• Job Ticket
• Labor Cost Card
• Time and Job Card
• Idle time card
Wage Systems
• 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.
• The following are the various methods of payment of wages

• Remuneration on Time basis
• Remuneration on Piece work
• Bonus Systems
• Indirect Monetary Incentives (Profit Sharing, Co-partnerships)
• Non monetary incentives like job security, social and general welfare,
sports, medical facilities etc.
Remuneration on time basis
• The wages is measured on the basis of unit of time i.e. hourly,
daily, weekly or monthly
• The formula is as follows:

Earnings = Hours worked * rate per hour
Example: If a worker is paid $10 per hour and has spent 300
hours during a particular month in a factory, his wages will be
300*$10 = $3000
Remuneration on time basis
01.Flat Time Rate (Ordinary Level):
• 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
02.High wages system:

• 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, overtime is not normally allowed
03.Graduated Time Rate:

• Under this method payment is made at time rate, which varies
according to personal qualities of the workers.
Advantages
• It is simple and easy to calculate
• It provides a regular and stable income to the worker and thus
creates a sense of security
• It is beneficial to the average as well as the below average workers
• Disadvantages
• This leaves no incentive for an efficient worker. An inefficient as
well as efficient workers are paid the same wages under this
method
• Since the orders are certain about their wages they may consume
more time for producing the same quantity.
Remuneration on piece work
• Under this system, wage are paid on the basis of production
• The formula is as follows:

Earnings = number of unit produced * rate per unit
Example:
If a worker is paid $15 per unit and he produces 20 units in 7
hours the total wages will be calculated as 20*$15 = $300
Remuneration on piece work
01. Straight Piece Rate:
• In this method, rate per unit is fixed, This method thus offers a
very strong incentive to the workers
02.Differential Piece Rates:

• Under these methods, the rate per standard per hour of
production is increased as the output level rises. In other words,
a worker is paid higher wages for higher productivity as an
incentive,
• Illustration: From the following particulars, calculate the
earnings of workers X and Y and also comment on the labor
cost. (Under Toylor differential piece rate system)
• Standard time allowed: 20 units per hour
• Normal time rate: Rs.30 per hour
• Differential to be applied:
• 80% of piece rate when below standard
• 120% of piece rate at or above standard
• In a particular day of 8 hours, X produces 140 units while Y
produces 165 units
• Solution:
• Standard production per day is 20 units 8 hours = 160 units
• Worker X produces 140 units which means he is below standard
and will get wages @ 80% of the normal price rate
• Normal piece rate = Rs.30 per hour/20 units = Rs.1.5 per unit
• 80% of the normal piece rate = Rs.1.20 per unit
• Earnings = Rs.1.20 * 140 units = Rs.168
• Y’s Earnings: Y has produced more than the standard production

of 160 units and hence he will get wages @ 120% of normal piece
rate.
• Normal piece rate = Rs.30 per hour/20 units = Rs.1.50 per unit
• 120% of normal piece rate = Rs.1.80 per unit
• Earnings = Rs.1.80 * 165 units = Rs.297
Advantages
• The system encourages greater efficiency
• No payment is required for the idle time
• The fixed overheads are reduced with the increase in output
• The work is completed more quickly and time wasting is
discouraged
• Disadvantages
• The quality of work may deteriorate
• The overwork on the part of workers is likely to result in ill-
health
• This may not be fair when the production is halted because of
shortage of materials, machinery breakdown
Bonus System
• 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 individual bonus schemes commonly used are as follows.
01.Halsey Premium Plan

02.Halsey-Weir Premium Plan
03.Rowan Plan
04.Barth Variable Sharing Plan
01.Halsey Premium Plan
Bonus is paid equal to wages of 50% of the time saved.
• Bonus = ( 50%* saved time*rate per hour)

• Total Earnings = H * R + Bouns
Where, H = Hours worked, R = Rate per hour
Ex: Time allowed for a job is 48 hours; a worker takes 40 hours

to complete the job. Time rate per hour is Rs.15Compute the total
earnings of the worker.
• Bouns = {50%* (48-40)* 15} = 60

• Total Earnings = (40 * Rs.15) + 60 = Rs.660.00
02.Halsey weir Plan
Bonus is paid equal to wages of 33 1/3% of the time saved.
• Bonus = ( 33.33%* saved time*rate per hour)

• Total Earnings = H * R + Bouns
Where, H = Hours worked, R = Rate per hour
Ex: Time allowed for a job is 48 hours; a worker takes 40 hours

to complete the job. Time rate per hour is Rs.15Compute the total
earnings of the worker.
• Bouns = {33.33* (48-40)* 15} = 39.99

• Total Earnings = (40 * Rs.15) + 39.99 = Rs.639.99
03. Rowan Plan
• 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.
• Bouns = { hours worked* saved time}* rate per hour

Standard time
• Bouns = { 40 * 8 } * 15 = 100
48
Total earning = ( 40*15) + 100 = 700
04.Barth Variable Sharing Plan
Total Earnings = Rate per hour Standard hours * Actual hours worked
=15 48*40
= 15* 43.82
= 657.26
Over Time
Overtime is the amount of time someone works beyond normal
working hours.
Over Time Allowance = ( OT Hours* Rate per OT hour)
Labour Turnover
• Labour turnover is the rate at which employees leave employment
at a factory. There are three methods of calculating of labour
turnover.
• 01. Labour Turnover = No.of employees leaving during the year *100
(Separation Method) Average No of employees
• 02. Labour Turnover = No.of employees replaced *100

( Replacement Method) Average No of employees
• 03. Labour Turnover = No.of employee leaving + No of employee replaced *100

(Flux Method) Average No of employees
Example:
• The following information is collected from the personnel department of ST
limited for the year ending 31st March 2008.
• No of workers at the beginning of the year 8,000
• No of workers at the end of year 9,600
• No of workers left the company during the year 500
• No of workers discharge during the year 100
• No of workers replaced due to leaving and discharges 700
• Additional workers employed for expansion during the year 1,500
• You are required to calculate labour turnover rate by using various method.
Solution:
• 01. Labour Turnover = No.of employees leaving during the year
(Separation Method) Average No of employees
= (100+500) = 6.82%
(8000+9600)/2
• 02. Labour Turnover = No.of employees replaced
( Replacement Method) Average No of employees
= 700 = 7.95%
(8000+9600)/2
• 03. Labour Turnover = No.of employee leaving + No of employee replaced
(Flux Method) Average No of employees
= 600+700 = 14.77%
(8000+9600)/2
Basic Salary 10, 000.00
Pay Slip (+) Add
Cost of living 7,800.00
Over Time 1,500.00
Uniform 1,000.00
Gross Salary 20,300.00
(-) Deductions
Salary Advance 2,500.00
Union Co 100.00
E.P.F 10% 2,300.00
Welfare 75.00
Loan installment 2000.00
Total Deduction 6,975.00
Net Salary 13,325.00
E.P.F 15% 3,045.00
E.T.F 3% 609.00
Thank You….

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CHAPTER 04:

1.Distinguish between the direct and indirect labor cost

2. Understand the various facets of labor cost control

4. Know the various methods of remuneration including incentive plans

5. Understand the pay roll accounting and disbursement of wages.

II. Engineering Department

III.Time Keeping Department

IV. Payroll Department

V. Cost Accounting Department

• Methods of time keeping:

• Methods of Time Booking :

• The following are the various methods of payment of wages

• The formula is as follows:

02.High wages system:

03.Graduated Time Rate:

• The formula is as follows:

02.Differential Piece Rates:

• Y’s Earnings: Y has produced more than the standard production

The individual bonus schemes commonly used are as follows.

01.Halsey Premium Plan

• Bonus = ( 50%* saved time*rate per hour)

Ex: Time allowed for a job is 48 hours; a worker takes 40 hours

• Bouns = {50%* (48-40)* 15} = 60

• Bonus = ( 33.33%* saved time*rate per hour)

Ex: Time allowed for a job is 48 hours; a worker takes 40 hours

• Bouns = {33.33* (48-40)* 15} = 39.99

• Bouns = { hours worked* saved time}* rate per hour

• 02. Labour Turnover = No.of employees replaced *100

• 03. Labour Turnover = No.of employee leaving + No of employee replaced *100

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