Accounting of Labour and Cost Control: Chapter-4

Chapter-4
ACCOUNTING OF LABOUR AND COST

CONTROL
Meaning and Concept of Labour Cost

Direct and Indirect Labour Cost
Control of Labour Cost
Organisation for Control of Labour Cost
Idel Time
Labour Turnover
Factors Affecting Cost of Labour
Method of Remuneration
Analysis of Accounting for Labour and Cost Control
· Direct Labour Cost to Prime Cost Ratio
· Direct Labour Cost to Factory Cost Ratio
· Direct Labour Cost to Cost of Production Ratio
· Direct Labour Cost to Cost of Sales Ratio
147
MEANING AND CONCEPT OF LABOUR COST

Labour cost is the second important element of cost of production.
Wages, salaries and other forms of remunerations represent a major
portion of the total cost of a product or services. The growth and
profitability of the concern depends upon proper utilization of human
resources or labour force which in turn needs proper accounting and
control of cost. Thus, control of labour cost is a very significant issue
from the view point of management.
Labour constitutes an important element of the total cost of

production. Human contribution is represented by labour. From the
sensitivity point of view of the various cost elements, the most sensitive
element is the labour cost, because human behavior is related to it.
Therefore, approach required to control labour cost is completely
different from the approach required for the control of other cost
elements. For the control of labour cost, the study of labour behavior,
performance measurement, results analysis, time and motion study,
control on the attendance and departure, in all matters human approach
are essential.1
Labour is such an element, the storing of which for the future is not
possible, therefore it is similar to most perishable material. Keeping
material idle will not result in loss unless such material is of perishable
nature; but on the hand, keeping labour idle will result in loss as for such
idle time also remuneration has to be paid. Labour has established itself
1. Shilliglaw Gordon, “Cost Accounting: Analysis and Control”, Richard D. Irwin Inc.
Homewood, Illinois, 1976, p.127.
148
as a very important part of the organization, in modern labour

management and, hence no problem with labour, except with human
approach, can be successfully solved. If management takes any measure
which affects the social, financial or political interest of the labour, that
may result in strike disruption in work and drainage of money. As a
result, a term agreement is entered by the present day management with
the labour unions and the obligations mentioned therein are faithfully
obeyed.
Labour cost control means labour cost control per unit. Unit cost
can be reduced by obtaining more output against the same rate of
remuneration. Thus labour cost reduction means for the same wage
obtaining more output or for the higher wage obtaining more output but
does not at all means wage-cut.
Industrial undertakings used to engage the following different type

of labours2:
a. Regular labour
b. Hired labour
c. Casual labour
d. Out workers
‘Regular labour’ are those labours who have been recruited on the
permanent requirements basis, ‘hired labour’ are those who have been
hired through labour agents or contractors, casual labours are those
2. Batty J., “Management Accountancy”, MacDonald and Evans Ltd, London, 1970, p.71.
149
labours who have been engaged on temporary basis as and when

required and ‘out workers’ are those who have been recruited as regular
or casual labour but has been sent to sites or customers’ premises.
Workers of all categories are classified into skilled labour and

unskilled labour, besides the above classification.
DIRECT AND INDIRECT LABOUR COST

The labour cost can be classified into two types:
(1) Direct Labour Cost,
(2) Indirect Labour Cost.
(1) Direct Labour Cost

Any labour cost that is specially incurred for or can be readily
charged to or identified with a specific job, contract, work order or any
other unit of cost is termed as direct labour cost.
Wages for supervision, wages for foremen, wages for labours who
are actually engaged in operation or process are the examples of direct
labour cost.
Idle time, overtime, and fringe benefits associated with direct labor
workers pose particular problems in accounting for labor costs. Are
these costs a part of the costs of direct labor or are they something else?
Idle Time
Overtime
Fringe Benefits
150
Idle Time : Machine beak downs, materials shortages, power

failure, and the like result in idle time. The labor costs incurred during
idle time are ordinarily treated as manufacturing overhead cost rather
than as a direct labor cost. Most managers feel that such costs should be
spread over all the production of a period rather than just the jobs that
happen to be in process when breakdown or other disruptions occur.
Overtime Premium: The overtime premium paid to all factory

workers (direct labor as well as indirect labor) is usually considered to
be a part of manufacturing overhead and is not assigned to any particular
order. At first glance this may seem strange, since overtime is always
spent working on some particular order. The reason is that it would be
considered unfair and arbitrary to charge an overtime premium against a
particular order simply because the order happened to fall on the tail end
of the daily production schedule.
Labour Fringe Benefits : Labour fringe benefits are made up of
employment-related costs paid by the employer and include the cost of
insurance programs, retirement plans, various supplemental
unemployment benefits, and hospitalization plans. The employer also
pays employer’s share of Social Security, Medicare, workers’
commission, federal employment tax, and state unemployment
insurance.
(2) Indirect Labour Cost
Indirect labour is for work in general. The importance of the

distinction lies in the fact that whereas direct labour can be identified
with and charged to the job, indirect labour cannot be so charged and
151
has, therefore to be treated as part of the factory overheads to be

included in the cost of production. For example, salaries and wages of
supervisors, storekeepers, maintenance labour, etc.3
CONTROL OF LABOUR COST
Control of labour cost is a significant influence on the growth,

profitability and cost of production.
Labour cost may become unduly high due to inefficiency of labour,

ineffective supervision, ideal time, unusual overtime work etc. The
primary objectives of the management therefore, are to efficiently utilize
the labour as economically as possible.
In order to achieve the effective utilization of manpower resources,

the management has to apply proper system of labour cost control. The
labour cost control may be determined on the basis of establishment of
standard of efficiency and comparison of actual with standards. The
management applies various techniques for the effective control of
labour costs as under:
(1) Scientific method of production planning.
(2) Use of labour budgets.
(3) Establishment of labour standards.
(4) Proper system of labour performance report.
(5) Effective system of job evaluation and job analysis.
3. Shah Parvin, “Cost Control and Information System”, p.197.

152
(6) Devise a proper system of control over idle time and unusual
overtime work.
(7) Establish a fair and equitable remuneration system.
(8) Effective cost accounting system.4
ORGANISATION FOR CONTROL OF LABOUR COST

The objectives of proper control on labour cost is effectively
achieved through the functions of various departments responsible for
controlling labour cost in an organisation.
The following are the important departments for control over

labour costs:
(1) Personnel Department
(2) Engineering and Works Study Department
(3) Time Keeping Department
(4) Pay Roll Department
(5) Cost Accounting Department.
(1) Personnel Department

Personnel department plays a very important role in control of
labour costs. It is primarily concerned with the recruitment of labours on
the basis of employee placement requisition and imparting training to
them and thereafter placing them to the job for which they are best
suited. In order to achieve the efficient utilization of manpower
resources, this department is responsible to execution of labour policies
which have been laid down by top management.
4. Baggott Joseph, “Cost and Management Accounting”, 1973, p.219.
153
(2) Engineering and Works Study Department
Engineering department is primarily concerned with maintaining

control over working conditions and production methods for each job,
process, operation or departments.
It is performed by undertaking the following functions :
(1) Preparation of plan and specification of each job.
(2) Maintaining required safety and efficient working conditions.
(3) Making time and motion studies.
(4) Conducting job analysis, job evaluation and merit rating.
(5) Setting fair and equitable piece rate or time wage system.
(6) Conducting research and experimental work.
In order to maintain control over working conditions and

production methods carrying a detailed study of the following operations
is necessary:
(a) Method Study
(b) Motion Study
(c) Time Study
(d) Job Analysis
(e) Job Evaluation
(f) Merit Rating.
(a) Method Study: It is one of the important components of work

study. The main aims of this study is to find a scheme of least wastage.
Method Study is defined as “a systematic and scientific evaluation of
154
existing and proposed plans and performance of any work system and
the evaluation of improvement, through analytical process of critical
examination.”
(b) Motion Study: Frank Gilbreth, who is the real founder of

Motion Study. According to him motion study may be defined as the
“science of eliminating wastefulness resulting from ill-directed and
inefficient motions.”
The following are the important objectives of the motion study:
(1) Effective ut1isation of material, machine and labours.
(2) Elimination of wastage of time and labours.
(3) Maintaining higher standards of safety and health.
(4) Reducing unnecessary movements in order to minimize

wastages.
(5) Better design of work place layout for effective production

process.
(6) Ensure fair remuneration with job satisfaction.
(c) Time Study: Time study is also called work measurement. Time
study may be defined as “the art of observing and recording the time
required to do each detailed element of an industrial operation.”
Uses of Time Study are following:

(1) It assists in setting standard time for each operation.
(2) It facilitates effective labour cost control.
155
(3) It helps to ascertain ideal time and over time to men and
machines.
(4) It is useful to establish fair and suitable wage rates and
incentives.
(5) It facilitates effective utilization of resources.
(d) Job Analysis: Job Analysis is a formal and detailed study of

jobs. Job analysis may be defined as the process of determining by
observation and study the task, which comprise the job, the methods and
equipment used and the skills and attitudes required for successful
performance of the job.
The following are the important advantages of job analysis :
(1) It is useful in classifying job and interrelationship among

them.
(2) If facilitates forecasting of manpower requirements.

(3) It helps in effective utilization of manpower resources.
(4) Effective employee development programme can be

established.
(5) Enables in determining performance standards of each
process or job.
(e) Job Evaluation: Job evaluation may be defined as “a process of
analyzing and describing positions, grouping them and determining their
relative value by comparing the duties of different positions in terms of
their different responsibilities and other requirements.” Job evaluation is
determined on the basis of job description and job analysis. The primary
156
purpose of job evaluation is to develop appropriate wage and salary

structure with internal pay equity between jobs.
(f) Merit Rating: Merit rating may be defined as “a systematic
evaluation of an employee’s performance on the job in terms of the
requirement of the job.” Merit rating is a system of measuring both
qualitatively and quantitatively of an employee’s capacity in relation to
his job.5
(3) Time Keeping Department

This department is concerned with following two important
activities:
(1) Timekeeping and
(2) Time Booking.
Timekeeping: It refers to recording of each worker’s time of
coming in and going out of the factory during engagement of the factory.
It is essential for the purpose of attendance and determination of wage
payable to each worker.
Objectives of Timekeeping: The following are the important
objectives of timekeeping:
(1) Preparation of payrolls
(2) Ensuring discipline in attendance
(3) Apportionment of overhead on the basis of labour hours
(4) Effective utilization of human resources
5. Oswal, Maheshwari, Modi and Gupta, “Advanced Cost Accounting and Cost Control”, R.B.D.
Publications, Jaipur, 2014, p.3.19.
157
(5) Minimization of labour costs

(6) Ascertaining ideal labour time and ideal machine time.
Methods of Timekeeping: The following are the two important
methods of timekeeping:
(1) Manual Method:

(a) Attendance Register Method
(b) Token or Disc Method.
(2) Mechanical Method:

(a) Time Recording clocks
(b) Dial Time Records
(c) Key Recorder System.
Manual Method: The choice of the manual method adopted by the
factory depends upon its size, number of workers employed, nature of
the business and policy of a firm. Under manual methods, there are two
important methods which are in use: (a) Attendance Register Method
and (b) Token or Disc Method.6
(a) Attendance Register Method: Under this method, an
attendance register is maintained by the Timekeeper in the
time office. This register may be filled in by the Timekeeper
when the worker gets inside the factory and the time of
departure.
This method is very simple and most suitable to small-scale
industries. It is very difficult to operate when the number of
workers is large.
6. www.kweblogics.com/2012/06/significance-of-cost-accounting.html
158
(b) Token or Metal Disc Method: In this method, each worker is

given a metal disc or a token bearing his identification
number. All the tokens or discs are hung on a board serially at
the entrance of the gate in the factory. As the worker enters
the gates of the factory, he removes his disc from the board
and drops it into a box.
This process is continued until the scheduled time expires.
Latecomers may drop their tokens in a separate box or
handover personally to the timekeeper. In the case of
absentees the tokens are not removed from the board. Based
on the above process, the timekeeper records the attendance
in the register known as Muster Roll for the purpose of pay
rolls.
This method is simple and economical. But it suffers from
certain disadvantages given below:
(a) There is chance to remove the disc of fellow worker’s
token from the board to ensure his presence.
(b) Difficult to ascertain about overtime work, early leaving,
ideal time etc.
(c) Lack of accuracy regarding the exact time of arrival of a
worker which may result in many disputes.
(d) Unless there is strict supervision, the timekeeper may
include dummy or ghost workers in the Muster Rolls.
Mechanical Method: In order to achieve the accuracy and reliability

of recording of time of workers, the following different mechanical
devices are used :
159
(a) Time Recording Clocks

(b) Dial Time Records
(c) Key Recorder System.
(a) Time Recording Clocks: Under this system, each worker is
given a time card for a week or fortnight. These time or clock cards are
serially arranged in a tray at the entrance to the factory. When the worker
enters the factory, he takes his allotted card from the tray and puts it in
the time recording clock that records the exact arrival time at the space
provided on the card against the particular day.
This process is repeated for recording time of departure for lunch,
return from lunch, leaving the factory after his day’s work. Late arrivals,
early leavings and overtime are printed in red so as to distinguish these
from normal period spent in the factory. This method is very popular for
correct recording of attendance.
(b) Dial Time Records: This is a machine which is used for

recording correct attendance time of arrival and departure of worker
automatically. This recorder has a number of holes about the
circumference. Each hole represents worker’s number which
corresponds to identification of allotted clock numbers. At the time of
arrival and departure of worker, by operating this machine, the dial arm
into a hole and the time is automatically recorded on an attendance sheet
placed inside. This machine is most suitable in small scale industries.
(c) Key Recorder System: In this machine there are a number of
keys, each key denotes worker’s number. When the time of arrival and
departure the worker inserts his allotted key in the key hole and gives a
160
turn, the ticket time and clock time are recorded on a sheet of paper. This
method is economical and easy to operate.
Time Booking : It refers recording the time of each worker for each
department, operation, process or job during engagement of the factory.
It is useful for the purpose of cost analysis and effective cost control.
Objectives of Time Booking: The following are the main objectives
of time booking:
(1) To ascertain the cost of each job, operation or process.
(2) To ascertain the cost of ideal time.
(3) Apportionment of overhead based on the suitable basis.
(4) To establish the fair and suitable wage system.
(5) To ensure the proper utilization of attendance time.
(6) To ensure the effective cost control and cost reduction.
Methods of Time Booking: In order to achieve the effective
utilization of manpower resources, recording the correct time of workers
and labour cost control is essential to adopt various methods of time
booking.
The following are the important methods used for time booking :
(1) Daily Time Sheet
(2) Weekly Time Sheet
(3) Job Cards or Job Tickets:
(a) Job Card For Each Worker
(b) Job Card For Each Job
(c) Combined Time and Job Card
(d) Piece Work Card
161
(1) Daily Time Sheet: This is one of the important methods which
is used for a daily record of the work done by each worker. This record
indicates that the nature of work, actual time spent by the worker on
each job or operation. The daily time sheet is allotted to each worker on
which the record is made by the worker himself or by the official
in-charge. This method is suitable only for small-scale industries.
(2) Weekly Time Sheet: This system may be done as in the case of
daily time sheet. Under this method, instead of recording time on daily
time sheets, worker is given a weekly time sheet on which recording by
the worker on each job for a week. This method is useful for those
concerns where the workers usually carryon a few jobs in a week.
(3) Job Card or Job Tickets: This method is adopted for recording
of time booking for a worker’s time spent on a job. A job card is
prepared for each job giving detailed particulars of the work to be
carried out by the worker. Job cards are classified into four types7:
(a) Job Card for Each Worker: Under this system, job card is
issued to each worker at the beginning of each day or week.
The job card is used to record the time of starting and
finishing the each job or work. It indicates the nature of work,
time spent by the worker for each job or operation, idle time,
total hours, rates and remuneration of different jobs during a
scheduled time.
(b) Job Card for Each Job: In this system, separate card is
prepared and allotted to each job. The job card is used to each
7. Oswal, Maheshwari and Jain, “Cost Accounting”, R.B.D. Publications, Jaipur, 2012, p.3.5.
162
job passes along with the job from worker to worker. As soon
as the worker receives the job card he records the time of
starting and finishing the job or operation. This system is
useful not only for correct calculation of wages for each job
but also it shows the details of the work to be done by the
worker.
(c) Combined Time and Job Card: Under this system, job card is
prepared on the basis of attendance time and actual time spent
by the worker. This system is useful to ascertain idle time,
time taken and time booking on account of pay rolls.
(d) Piece Work Card: This system is adopted where the piece
wage payment is applicable.8
Idle Time
Wage payment is made on the basis of quantity of output produced
by the worker. A piece work card is allotted to each worker on which
recording the quantity of work to be done by each worker is given. For
determination of piece wage payment, the time spent by the worker is
not taken into account. This method is suitable only for small scale
industries.
Idle Time is that time during which the workers spend their time
without giving any production or benefit to the employer and concern.
The idle time may arise due to non-availability of raw materials,
shortage of power, machine breakdown etc.
Types of Idle Time: It refers to any loss of time which is inherent in
every situation which cannot be avoided. Any cost associated with the
8. Phophalia A.K., “Cost Accounting”, RBSA Publishers, Jaipur, 2004, p.92.
163
normal idle time are mostly fixed in nature. The normal idle time arises
due to the following reasons :
(1) Time taken for personal affairs.
(2) Time taken for lunch and tea break.
(3) Time taken for obtaining work.
(4) Time taken for changing from one job to another.
(5) Waiting time for getting instructions, tools and or raw

materials, spare parts etc.
(6) Time taken by the workers to walk between factory gate and
place of work.
Abnormal Idle Time
Abnormal idle time refers to any loss of time which may occur due
to some abnormal reasons.
Abnormal idle time can be prevented through effective planning
and control. The abnormal idle time may arise due to the following
avoidable reasons :
(1) Faulty planning.
(2) Lack of co-operation and co-ordination.
(3) Power failure.
(4) Time lost due to delayed instructions.
(5) Time lost due to inefficiency of workers.
(6) Time lost due to non-availability of raw materials, spare parts,
tools etc.
(7) Time lost due to strikes, lock outs and lay-off.
164
Accounting Treatment of Normal Idle Time and Abnormal Ideal

Time
Normal Idle Time: Normal idle time wages is treated as a part of

cost of production. Thus, in case of direct workers an allowance for
normal idle time is built into labour cost rates. In the case of indirect
workers, normal idle time wage is spread over ,all the products or jobs
through the process of absorption of factory overheads.
Abnormal Idle Time: Abnormal idle time cost is not included as a

part of production cost and is shown as a separate item in the Costing
Profit and Loss Account so that normal cost is not distributed.
Over Time: The term “over time” refers to when a worker works
beyond the normal working hours or scheduled time is known as
‘overtime.’ According to Factories Act, the wage rate of overtime work
is to be paid at double the normal rate of wages. The extra amount of
remuneration is paid to the worker in addition to normal rate of wages is
said to be overtime premium.
Effect of Over Time Payment on Productivity: The following are
the effects of over time payment on productivity:
(1) Overtime premium is an extra payment over normal wages
and hence will increase the production cost.
(2) The efficiency of workers during overtime work may fall and
hence output may be reduced.
(3) To earn more, workers may not concentrate on work during
normal hours, and thus the output during normal hours may
fall.
165
(4) Reduced output and increased premium will increase the cost
of production.
Accounting Treatment of Overtime Wages: The following are the

ways of charging of overtime premium:
(1) If overtime is resorted to at the desire of the customer then

overtime premium is charged to concerned job directly.
(2) If overtime is required to cope with general production

schedule or for meeting urgent orders, the overtime premium
should be treated as overhead cost of particular department or
cost center which works overtime.
(3) If overtime is worked on account of abnormal conditions such
as flood, earthquake etc. that should be charged to costing
profit and loss account.
Control of Overtime: Control of overtime is essential to minimize
the cost of production and increase the overall performance of the
efficiency. Effective control of overtime can be possible through the
following ways :
(1) Effective sound planning of production

(2) Adequate supervision
(3) Ensuring availability of raw materials, spare parts

(4) Encouraging productivity
(5) Reducing labour turnover
(6) Ensuring effective system of repairs and maintenance,

material handling and smooth flow of production
166
(7) Fair and equitable remuneration to efficient and inefficient

workers.
(4) Pay Roll Department
This is one of the important departments, which is responsible for

computation, preparation, and payment of wages to all employees of the
entire organization. Wage Sheet or Pay Roll is prepared on the basis of
the Piece Work Card or Time Card or both. It is a statement which shows
the detailed records of the employees’ remunerations such as gross
wages, various reductions and net wages for particular period.
In order to ensure the proper determination and preparation of wage

sheet, the pay roll department should be taken a special care. A
systematic procedure for payment of wages should be adopted to
preventing of frauds and irregularities in wage payments. Effective
supervision and strict control are essential to ensure that the worker is
not paid twice or no dummy name of workmen have been entered in the
pay roll.
Labour Turnover
Labour Turnover may be defined as “the rate of changes in labour

force, i.e., the percentage of changes in the labour force of an
organization during a specific period. Higher rate of labour turnover
indicates that labour is not stable and there are frequent changes in the
labour force in the organization.
167
It will affect the efficiency of the workers and overall profitability

of the firm. The determinant result of labour turnover is expressed in
terms of percentage.
Methods of Measurement of Labour Turnover : The following are

the important methods of measuring labour turnover: (a) Separation
Method (b) Replacement Method (c) Flux Method.
(a) Separation Method : Under this method, labour turnover is

calculated by dividing the total number of separation (number of
employees left or discharged) during the period by the average number
of workers on the pay roll.
Thus, the formula is :

No. of Separation during the Period
Labour Turnover = ´ 100
Average No. of Workers during the Period
(b) Replacement Method : In this method, labour turnover is

measured by dividing the number of replacement of workers during the
period by average number of workers during the period.
Thus formula may be expressed as :
No. of Workers Replaced during the period

Average No. of Workers during the period
(c) Flux Method : Under this method, labour turnover is measured

by dividing the total number of separation and replacement of workers
by the average number of workers during the period. Thus the formula is
:
168
No. of Separation + No. of Replacement

Average No. of Workers during the period
Causes for Labour Turnover: The causes for labour turnover can be
classified into two categories (a) Avoidable Causes, (b) Unavoidable
Causes.
(a) Avoidable Causes:
(1) Lack of job involvement
(2) Lack of co-operation among the employees
(3) Lack of smooth relationship between employer and

employees
(4) Dissatisfaction with wages and incentives
(5) Bias attitude of Management
(6) Poor working conditions
(7) Dissatisfaction with promotion, recognition, transfer etc.

(8) Lack of Co-ordination
(9) Non-availability of adequate protection, proper instructions,
accommodation etc.
(2) Unavoidable Causes:
(1) Retirement or Death of employer
(2) Marriage in the case of female workers
(3) Permanent disability due to accident or illness
(4) Dismissal or discharged due to inefficiency or disciplinary
ground
169
(5) Dissatisfaction with job

(6) Shortage of power, raw materials etc.
(7) Personal responsibilities
(8) Personal betterment with regard to new job
(9) Change in nature of business and plant location.
Effect of Labour Turnover:
(1) Increased cost of recruitment, training and placement

(2) Increased cost of production
(3) Decrease in output due to inefficient or newly recruited

workers
(4) Higher accident rate due to negligence or mishandling of
machines
(5) Low team spirit due to lack of co-operation and co-ordination
between the workers and employers.
The chief aim of the preventive costs which are incurred in order to
keep the workers satisfied and reduce the labour turnover rate as much
as possible. These preventive costs which include the following:
(a) Cost of providing medical facilities, canteen and other

welfare facilities
(b) Cost of administration
(c) Cost of providing better working conditions

(d) Cost of pension, gratuity, provident fund and other retirement
benefits.
170
Replacement Costs: These costs include the following :

(a) Cost of recruitment, training and placement
(b) Increase wastages and scrap
(c) Cost of repairs and maintenance including machine
breakdowns
(d) Cost of compensation on account of accidents
(e) Loss of output due to inefficiency or newly recruited
workers.9
FACTORS AFFECTING COST OF LABOUR
1. Assessment of Man Power Requirment: Correct assessment of

manpower requirement will decrease the cost of labour because they are
actually we need, if laborers are more than these numbers, its excess cost
will be suffered by the company and overall cost of labour will increase.
To assess of manpower requirement, is the duty of personnel department.
So, it should be do its duty with best way.
2. Time and Motion Study: In this study, supervisor records time

spent on each job and correct record will reduce excess paid for overtime
to workers.
3. Control over Idle Time and Overtime: Idle time is time when
worker is not doing any production activity due to delay of receiving the
material or electricity cut or any other things. This is loss of business and
it will increase the cost of labour. By continuing supply of raw material,
9. www.labourcostcontrol.com
171
review and repair of machines and continue supply of electricity can

reduce idle time loss. But some time, these factors are also not under our
own control. So, we have to depend on others. Overtime cost also can be
optimized by providing good amount for this.
4. Wage System: Wages should be at competitive price. High and

low rate of wages will disturb workers and increase cost of labourers. It
also is on the basis of time or unit produced.
5. Control over Labour Turnover: Labour turnover means losing of
laborers due to not providing good wages or incentive or any other
reason. It will increase the cost of training of new workers and also
errors in production. So labour turnover should minimize as soon as
revealed.
Method of Remuneration
There are two basic methods of wages payment10:

(1) Time Wages System and (2) Piece Wage System.
Under time wage system, wages are paid on the basis of time spent
on the job irrespective of the amount of work done. This is known as
Time Rate or Day Wage System. The unit of time may be a day, a week,
a fortnight or a month. Under piece wage system, remuneration is based
on the amount of work done or output of a worker. This is known as
“Piece Rate System” or “Payment by Result.” Thus, a workman is paid
in direct proportion to his output.
10. Agarwal N.P., Jain Sugan C., Sharma M.L., Shah C.K. and Mangal S.K., ‘’Cost Accounting’’,
Ramesh Book Depot, Jaipur, 2004, p.3.12.
172
A variety of bonus and premium plans have been designed to

overcome the drawbacks of two basic methods of wage payments.
A system of incentive plans also takes into consideration the
primary principles of these two basic plans known as Incentive or Bonus
or Premium Plan.
Following are the important methods of remuneration which may
be grouped into:
(1) Time Rate Systems
(2) Piece Rate Systems
(3) Bonus System (or) Incentives Schemes

(4) Indirect Monetary Incentives.
These may be further classified as under:
(1) Time Rate System:

a. At Ordinary Levels
b. At High Wage Levels
c. Guaranteed Time Rates.
(2) Piece Rate System:

a. Straight Piece Rate
b. Piece Rates with Guaranteed Time Rate
c. Differential Piece Rates : (i) Taylor’s Differential Piece
Rate System, (ii) Merrick Differential Piece Rate System
(iii) Gantt Task and Bonus Plan.
(3) Bonus System or Incentive Schemes:

a. Halsey Premium Plan
173
b. Halsey-Weir Premium Plan

c. Rowam Plan
d. Barth Variable Sharing Plan
e. Emerson Efficiency Plan
f. Bedaux Point Premium System
g. Accelerating Premium Plan
h. Group or Collective Bonus Plans.
(4) Indirect Monetary Incentives:

a. Profit-Sharing
b. Co-Partnership
(1) TIME RATE SYSTEM
(a) Time Rate at Ordinary Levels
This is also termed as “Day Wage System” or “Flat Rate System”.

Under this system, wages are paid to the workers on the basis of time
spent on the job irrespective of the quantity of work produced by the
workers. Payment can be made at a rate per day or a week, a fortnight or
a month. The formula for calculation of payment of time rate of ordinary
levels is as follows :
Remuneration or Earnings = Hours Worked ´ Rate per Hour
Time wage system is suitable under the following conditions:
1) Where the units of output are difficult to measure, e.g.

watchman.
2) Where the quality of work is more important e.g., artistic

furniture, fine jewellery, carving etc.
174
3) Where machinery and materials used are very sophisticated

and expensive.
4) Where supervision is effective and close supervision is

possible.
5) Where the workers are new and learning the job.
6) Where the work is of a highly varied nature and standard of

performance cannot be established.
Advantages
1) It is simple and easy to calculate.
2) Earning of workers are regular and fixed.
3) Time rate system is accepted by trade unions.
4) Quality of the work is not affected.

5) This method also avoids inefficient handling of materials and
tools.
Disadvantages
1) No distinction between efficient and inefficient worker is
made and hence they get the same remuneration.
2) Cost of supervision are high due to strict supervision used for
high productivity of labour.
3) Labour cost is difficult to control due to more payment may
be made for the lesser amount of work.
175
4) No incentive is given to efficient workers. It will depress the

efficient workers.
5) There are no specific standards for evaluating the merit of
different employees for promotions.
(b) Time Rate at High Levels
Under this system, efficient workers are paid higher wages in order
to increase production. The main object of this method designed to
remove the drawbacks of time rate at ordinary levels. This system is
simple and easily understandable. When higher rate of wages are paid, it
not only reduces labour turnover but also increases production and
efficiency.
(c) Guaranteed Time Rates
Under this method the wage rate is calculated by considering to

changes in cost of living index. Accordingly, the wage rate is varied for
each worker according to the change in cost of living index. This system
is suitable during the period of raising prices.11
(2) PIECE RATE SYSTEM
This is also known as “Piece Wage System” or “Payment By

Result.” Under this system, wages of a worker are calculated on the
basis of amount of work done or output of a worker. Accordingly, a
worker is paid in direct proportion to his output.
11. Anthony and Welsch, “Fundamentals of Management Accounting”, 2007, p.223.
176
Advantages
1) It facilitates direct relation between efforts and reward.
2) This system encourages the efficient workers to increase
production.
3) Under this system efficient workers are recognized and
rewarded:
4) It helps to reduce the cost of supervision and idle time.
5) Tenders or quotations can be prepared confidently and
accurately.
Disadvantages
1) Where a concern is producing large quantities, it is difficult to
fix a piece rate.
2) In order to maximize their earnings, workers working with
high speed may affect their health.
3) The quality of output cannot be maintained.
4) This system is not encouraging to the inefficient workers.
5) Temporary delays or difficulties may affect the earnings of
the workers.
Piece Rate System is suitable where

1) Quality and workmanship are not important.
2) Work can be measured accurately.
3)
177
Quantity of output directly depends upon the efforts of the

worker.
4) Production of standardized goods in a factory.
5) Job is of a repetitive nature.
There are three important methods of paying labour remuneration
falling under this type : (a) Straight Piece Rate (b) Piece Rates with
Guaranteed Time Rates and (c) Differential Piece Rates.
(a) Straight Piece Rate: Under this system workers are paid
according to the number of units produced at a given rate per unit. Thus,
total earnings of each worker are calculated on the basis of his output
irrespective of the time taken by him. The following formula is used for
measuring piece work earning:
Straight Piece Work Earnings = Units Produced ´ Rate Per Hour
(b) Piece Rate with Guaranteed Time Rates: Under this method, the
worker earning from piece work less than the guaranteed minimum
wage, will get the fixed amount of guaranteed time rate. A guaranteed
rate would be paid per hour rate or day rate or week rate.
(c) Differential Piece Rates: This system is designed to provide for
variation of piece rates at different levels of output. Accordingly increase
in wages is proportionate to increase in output. Under this system
efficient workers get ample reward and at the same time inefficient
workers are motivated to earn more. The following are the important
types of differential piece rates :
(i) Taylor’s Differential Piece Rates System: F.W. Taylor, who is
the father of scientific management, introduced this plan.
Under this system, two piece rates are applicable on the basis
178
of standard of performance established. Accordingly one is

high rate and the other one is lower rate. Thus high piece rate
is applicable for standard and above the standard
performance. Lower piece rate for those workers with below
the standard performance.
(ii) Merrick’s Differential Piece Rates System: Under this
method, three piece rates are applied with different levels of
performance accordingly.
(iii) Gantt’s Task Bonus Plan: This system is designed by Henry
L. Gantt. Under this system standard time for every task is
fixed through time and motion study. The main feature of this
system is a good combination of time rate, differential piece
rate and bonus. In this system day wages are guaranteed to all
workers.
3. BONUS OR INCENTIVES SCHEMES

Incentive Scheme of wage payment is also known as Premium
Bonus Plans. Introduced in order to increase production with ensuring
proper industrial climate. Wage incentive plans may be of two types :
(A) Individual Incentive Plans and (B) Group Incentive Plans.12
A. Individual Incentive Plans

Under individual incentive plans, remuneration can be measured on
the performance of the individual worker. In the case of the group
incentive scheme earnings can be measured on the basis of the
productivity of the group of workers or entire work force of the
12. Kumar Nirmal Prasad, “Cost Accounting”, ICWAI, icwai.intermediate_notes, Jan 15, 2013.
179
organization. Various types of incentive schemes are combinations of

time and piece rate systems. The following are the important individual
incentive plans discussed below :
(1) Halsey Premium Plan: This Plan was developed by F.A. Halsey.
This system also termed as Split Bonus Plan or Fifty-Fifty Plan. Under
this plan, Standard time is fixed for each job or operation on the basis of
past performance. If a worker completes his job within or more than the
standard time then the worker is paid a guaranteed time wage. If a
worker completes his job within or less than the standard time, then he
gets a bonus of 50% of the time saved plus normal earnings. Under this
method, the total earnings is calculated as follows:
Total Earning = Guaranteed Time Wages + Bonus of 50% of Time saved
(or)
Total Earning = T ´ R + 50% (S - T) R
Where T = Time Taken; R = Hourly Rate; S = Standard Time
Total Earnings = Time taken ´ hourly rate
50
+ (Time Saved ´ Hourly Rate)
100
Merits:
1) It is simple to understand.
2) Total earnings of each worker can be easy to calculate.
3) Both employer and employee get equal benefit of time saved.
4) This system not only benefits efficient worker but also
provides average worker to get guaranteed minimum wages.
5) This system is based on time saved and it can reduce the
labour cost.
180
Demerits:
1) Lack of co-operation among the employees.
2) Under this system establishment of standard is very difficult.
3) Earning are reduced at high level of efficiency.
(2) The Halsey-Weir Scheme: Under this system the worker gets
the bonus of 30% of the time saved instead of 50% of time saved under
Halsey Plan. Except for this, Halsey Plan and Halsey-Weir Systems are
similar in all other respects.
(3) Rowan Plan: This plan was introduced by James Rowan of
England. It was similar to the Halsey Plan in many respects except that it
differs in calculation of bonus. Under this system, bonus is determined
as the proportion of the time taken which the time saved bears to the
standard time allowed.
(4) Emerdon’s Efficiency Sharing Plan: Under this plan, earning of
a worker is by combining guaranteed day wages with a differential piece
rate. Accordingly the level of efficiency is determined on the basis of
establishment of standard task for a unit of time. If the level of worker’s
efficiency reaches 67% the bonus is paid to him at a normal rate. The
rate of bonus increases in a given rate as the output increases from 67%
to 100% efficiency. Above 100% efficiency, the bonus increases to 20%
of the wage earned plus additional bonus of 1% is added for each
increase of 1% in efficiency.
(5) Bedaux Point Premium System: This plan was introduced by
Charles E. Bedaux in 1911. Under this plan, standard time fixed for each
operation or job is expressed in terms of Bedaux point or ‘B’. For
example, a standard time of 360 B means the operation or job should be
181
completed within 360 minutes. The chief advantage of this plan is that it
can be applied to any kind of job. Under this system, worker is paid at
the time for actual hours worked and 75% of the wages for the time
saved are paid as bonus to the worker and 25% to the foremen,
supervisors etc. Following is the formula for calculation of total wages
of a worker:
Total Earnings = S ´ R + 75% of R (S - T)
(6) Accelerating Premium Bonus Plan : Under this plan, bonus is
determined on the basis of time saved unlike a fixed percentage under
Halsey Plan and as decreasing percentage under Rowan Plan. The bonus
is paid to workers at an increased rate. This provides increasing
incentives to efficient workers.
B. Group or Collective Bonus Plan
The incentive schemes explained so far are applicable to individual

performance depending directly on production. However it is not the
individual workers who produce the goods or services (operation) alone
but group of several other workers are required to jointly perform a
single operation. It is, therefore, essential that a group incentive scheme
should be introduced. Bonus is calculated for a group incentive scheme.
The bonus is calculated for a group of workers and the total amount is
distributed among the group of workers on anyone of the following
basis:
(a) Equally by all the workers of the group.
(b) Pro rate on the time rate basis.
182
(c) Pre determined percentage basis.

(d) Specified proportion basis.
Following are the important types of group incentive bonus plans:

(1) Budgeted Expenses bonus plan
(2) Priest Man bonus Plan
(3) Towne’s Gain-sharing Plan
(4) Scanlon Plan
(1) Budgeted Expenses Bonus Plan: Under this method, bonus is
determined on the basis of savings in actual expenditure compared with
total budgeted expenditure.
(2) Priest man Bonus Plan: Under this plan standard performance is
fixed by the management and committee of works. The group of workers
get bonus when actual performance exceeds the standard performance
irrespective of individual’s efficiency or inefficiency.
(3) Towne’s Gain-sharing Plan: Under this plan, bonus is calculated

on the basis of savings in labour cost. The group of workers get bonus
when actual costs is less than the standard costs, one -half of the savings
is distributed among workers including foremen in proportion with the
wages earned.
(4) Scanlon Plan: Scanlon Plan is designed with the chief aim of
reducing the cost of operations in order to increase the production
efficiency. This plan is generally applicable in industries where the
operation cost is high. Under this scheme, bonus is determined on the
183
basis of standard costs or wastages and percentage of the reduction in

operation cost.13
4. INDIRECT MONETARY INCENTIVE

Indirect schemes are regarded beneficial to both employers and
workers. In this regard, under indirect monetary incentives by giving
them a share of profit and introducing co-partnership scheme or as they
have become partners in the business in order to make a very profitable
enterprise.
Profit Sharing: Profit Sharing and bonus is also known as Profit
sharing Bonus. Under this scheme, there is an agreement between the
employer and employee by which employee receives a share, fixed in
advance of the profits. Accordingly profit sharing bonus refers to the
distribution of profit on the basis of a certain percentage of one’s
monthly earnings. The amount to be distributed depends on the profits
earned by an enterprise. The proportion of the profits to be distributed
among the employees is determined in advance.
Co-partnership: This system provides not only a worker to become
partner in the business but also to share in the profit of the concern.
There are different degrees of partnership and share of responsibilities
allowed to the workers to take part in its control.14
5. NON-MONETARY INCENTIVE SCHEMES

Under this system, employees are provided better facilities, instead
of additional monetary payments. Some of the examples of
13. Maheshwari S.N., “Cost and Management Accounting”, Sultan Chand & Sons, 2008, p.121.
14. Sharma H.L., Bhardwaj D.K. and Biyani Sanjay, “Fundamentals of Accounting”, R.B.D.
Publications, Jaipur, 2011, p.1.18.
184
non-monetary incentives are free education for children, rent free

accommodation, medical facilities, canteen facilities, welfare facilities,
and entertainment facilities etc.
*****
184
ANALYSIS OF ACCOUNTING FOR LABOUR AND COST

CONTROL
The analysis of accounting for labour and cost control of the

companies under study has been made under the following heads
1. Direct Labour Cost to Prime Cost
Direct labour cost is one of the components of prime cost and bears
an important part in prime cost after the direct materials. The ratio of
direct labour to prime cost of the companies under study has been used
by using the following formula-
Direct Labour Cost

Ratio of Direct Labour Cost to Prime Cost =
Prime Cost
The ratio of direct labour to prime cost of the companies under

study has been shown in the following Table 4.1.
Table 4.1
Direct Labour to Prime Cost Ratio of the Companies under Study
(From 2008-09 to 2012-13)
(Ratio in Times)
Years RSWM BSL MSUML STIL
2008-09 0.10 0.14 0.08 0.11
2009-10 0.10 0.15 0.09 0.12
2010-11 0.10 0.15 0.07 0.10
2011-12 0.09 0.14 0.07 0.10
2012-13 0.10 0.16 0.08 0.11
Average 0.10 0.15 0.08 0.11
S.D. 0.00 0.01 0.01 0.01
C.V.(%) 0.00 6.67 12.50 9.09
Source: Annual Reports & Accounts of the companies under study for the period from 2008-09 to
2012-13.
185
RSWM: Table 4.1 shows that the ratio of direct labour cost to prime
cost in RSWM showed a consistent trend during the whole period of
study except in the year 2011-12 otherwise the ratio of direct labour cost
to prime cost was 0.10 times for the whole period of study though there
was an increasing trend both in the amount of direct labour and prime
cost. It signifies that per unit expenditure on direct labour remained
consistent during the period of study denoting an efficient control over
the direct labour. The average of the ratio was 0.10 times which can be
regarded satisfactory. The coefficient of variation was nil as there was no
fluctuation because the ratio of direct labour to prime cost remained
same throughout the period of study.
BSL: It can be observed from the above table that the ratio of direct
labour cost to prime cost in BSL showed a consistent trend during the
whole period of study and fluctuated within the range of 0.16 times in
2012-13 to 0.14 times in 2008-09. It is to be noted here that the direct
labour cost and the prime cost of the production showed an increasing
trend signifying an increase in the production and remaining a consistent
ratio of direct labour cost to prime cost denotes that the per unit cost of
direct labour cost to prime cost remained same throughout the period
under study. It denotes an efficient management and control over the
direct labour cost. The average of the ratio was 0.15 times which can be
regarded satisfactory. The coefficient of variation was 6.67 percent
denoting a consistent trend which should be maintained in future also.
Moreover, it is suggested that the control over the direct labour cost
should also be maintained in the similar manner.
186
MSUML: From the table, it can be ascertained that the ratio of

direct labour cost to prime cost in MSUML showed a consistent trend
during the whole period of study and fluctuated within the range of 0.09
times in 2009-10 to 0.07 times in 2010-11. A consistent trend of the ratio
of direct labour cost to prime cost reveals that the per unit cost of direct
labour remained almost same although there was increase in the volume
of production as the direct labour cost and the prime cost showed an
increasing trend during the whole period of study except in the year
2012-13 when there was a marginal decrease in the prime cost. The
average of the ratio was 0.8 times which can be regarded satisfactory as
it denotes an effective control over the direct labour expense. The
coefficient of variation was 12.50 percent denoting a consistent trend
and it can be suggested that the management of MSUML should try to
maintain the same policy in future also.
STIL: Table 4.1 reveals that the ratio of direct labour cost to prime
cost in STIL showed a consistent trend during the whole period of study
and this ratio fluctuated within the range of 0.12 times in 2009-10 to
0.10 in 2010-11 despite an increasing trend in the commercial
production of the company because the direct labour cost and the prime
cost showed an increasing trend during the period of study. The
consistent trend shows that the management of the company kept the per
unit cost of labour intact which gives an indication of an efficient
management. The average of the ratio was 0.11 times which can be
regarded satisfactory. Since there was no much fluctuation so the
187
coefficient of variation was 9.09. It is therefore, suggested that the

management of the company should follow the same policy in future
also.
An overall analysis of the ratio of direct labour cost to prime cost

reveals that the average of this ratio was highest in BSL as the average
was 0.15 times otherwise for RSWM, MSUML and STIL the ratio
fluctuated within 0.08 to 0.11 times which means that the expenditure on
direct labour cost was under control in comparison to the expenses
incurred on direct material cost. It is suggested that the management of
these companies should try to follow the same practice in future. The
fluctuations were negligible as the coefficient of variation was within the
allowable limits.
Test of Significance (t-test)
Test of significance has been applied to test the hypothesis. For this
purpose t-test has been applied by comparing one company with another
company.
(a) Between RSWM and BSL
Null Hypothesis: There is no significant difference in the ratio of

direct labour cost to prime cost of RSWM and BSL.
Value of t = 11.17
Critical Value of t at 5 percent level of significance (for V=8) is 2.306.
188
Decision: The null hypothesis is rejected because the computed

value of t is more than the critical value of t at 5 percent level of
significance. Hence, it can be concluded that the difference in the ratio
of direct labour cost to prime cost of RSWM and BSL is significant.
(b) Between RSWM and MSUML

direct labour cost to prime cost of RSWM and MSMUL.
Value of t = 4.47
Critical Value of t at 5 percent level of significance (for V=8) is 2.306
of direct labour cost to prime cost of RSWM and MSUML is significant
(c) Between RSWM and STIL

direct labour cost to prime cost of RSWM and STIL.
Value of t = 2.23
Decision: The null hypothesis is accepted because the computed
value of t is less than the critical value of t at 5 percent level of
of direct labour cost to prime cost of RSWM and STIL is not significant.
(d) Between BSL and MSUML

189

direct labour cost to prime cost of BSL and MSUML.
Value of t = 11.06

of direct labour cost to prime cost of BSL and MSUML is significant.
(e) Between BSL and STIL

direct labour cost to prime cost of BSL and STIL.
Value of t = 6.32

of direct labour cost to prime cost of BSL and STIL is significant.
(f) Between MSUML and STIL

direct labour cost to prime cost of BSL and STIL.
Value of t = 4.74
190

of direct labour cost to prime cost of MSUML and STIL is significant.
Analysis of Variance (F-Test)
To test the significance of direct labour cost to prime cost ratio of

the textile companies under study F test has been applied and following
hypotheses have been tested
(i) Null Hypothesis (H0) : There is no significant difference in the

direct labour cost to prime cost ratio of the companies under study.
(ii) Null Hypothesis (H0): There is no significant difference in the

year-wise direct labour cost to prime cost ratio of the textile companies
under study.
Degree of Variance
Source Sum Freedom (Sum F Ratio
(d.f.) /d.f)
F= 173.32
0.013 (c-1)=(4-1)=3 0.004333
Between Companies (SSC) (Between Companies)
Within Companies (SSR) 0.0005 (r-1)=(5-1)=4 0.000125 F=5.00
0.0003 (c-1)(r-1)=12 0.000025 (Within Companies)
Error (SSE)
Table 4.2
ANOVA TABLE
(i) F-Test Between the Companies

HigherVariance 0.004333
F= = = 173.32
SmallerVariance 0.000025
191
Critical value of F at 5 percent level of significance (V1 = 3 and V2

= 12) is 3.49
Decision: Since the calculated value of F is more than the critical

value of F at 5 percent level of significance, therefore the Null
Hypothesis is rejected and it is concluded that the difference in the direct
labour cost to prime cost ratio of the textile companies under study is
significant.
(ii) F-Test within the Companies

F= = = 5.00

= 12) is 3.26

Hypothesis is rejected and it is concluded that the year-wise difference in
the direct labour cost to prime cost ratio of the textile companies under
study is significant.
2. Direct Labour Cost to Factory Cost Ratio
Direct labour cost to factory cost ratio plays an important role

towards the absorption of overheads. While calculating the quotation or
tender price this ratio is used as the base for estimation of other
192
overheads. In the present study this ratio has been calculated as follows-
Direct Labour Cost
Ratio of Direct Labour Cost to Factory Cost =
Factory Cost
The ratio of direct labour cost to factory cost of the textile

companies under study has been calculated and presented in the
following Table 4.3.
2008-09 0.09 0.12 0.07 0.10
2009-10 0.09 0.12 0.07 0.11
2010-11 0.08 0.13 0.06 0.09
2011-12 0.08 0.12 0.06 0.09
2012-13 0.09 0.14 0.07 0.09
Average 0.086 0.126 0.066 0.096
S.D. 0.005 0.008 0.005 0.008
C.V.(%) 5.81 6.35 7.58 8.33
Table 4.3
Direct Labour Cost to Factory Cost Ratio
of the Companies under Study
(From 2008-09 to 2012-13)
(Ratio in Times)
2012-13.
RSWM: It can be noted from the above table 4.3 that the ratio of
direct labour cost to factory cost showed a consistent trend during the
whole period of study and varied within the range of 0.09 times to 0.08
times. The average of the ratio was 0.086 times which can be regarded
satisfactory. Moreover it can be noted from the above that the proportion
of direct labour cost to factory cost remained same despite increase in
the production because the direct labour cost and the factory cost
193
showed an increasing trend during the period of study. The coefficient of

variation was 5.81 percent showing a consistent trend which should be
maintained in future also. Further it can be suggested that the
management of the company should follow the same practice in future
also.
BSL: The table shows that the ratio of direct labour cost to factory
cost in BSL showed a consistent trend during the whole period of study.
During the years 2008-09 and 2009-10, this ratio was 0.12 which
marginally increased to 0.13 times in 2010-11 but marginally decreased
to 0.12 times in 2011-12 and finally increased to 0.14 times in 2012-13.
The production level of the company continuously increased but the
consistency of the ratio shows the consistent relationship of direct labour
cost and prime cost i.e. the per unit direct labour cost remained same.
The average of the ratio was 0.126 times which can be regarded
satisfactory. The coefficient of variation was 6.35 percent denoting a
consistent trend and it is suggested that the management of the company
should follow the same policy in future to have an effective control over
the direct labour cost.
MSUML: It is evident from the above table that the ratio of direct
labour cost to factory cost in MSUML showed a consistent trend during
the whole period of study and fluctuated within the range of .07 times to
.06 times during the period of study. The average of the ratio was 0.066
times for the period of study denoting a favorable position of direct
labour cost and signifies that there was an effective control over the
194
direct labour cost. The coefficient of variation was 7.58 percent denoting
a consistent trend. It can be suggested that the management of MSUML
should continue with the same labour policy in future also.
STIL: It can be ascertained from the above table that ratio of direct
labour cost to factory cost in STIL showed a fluctuating but a consistent
trend during the period of study. Initially during the year 2008-09, the
ratio of direct labour cost to factory cost was 0.10 times which
marginally increased to 0.11 times in 2009-10 and then after it decreased
and remained unchanged at 0.09 times during the remaining period of
study. During the course of study the commercial production of the
company showed an increasing trend and accordingly the factory cost
and direct labour cost increased but because of remaining the per unit
cost of direct labour unchanged the ratio showed a consistent trend. The
average of the ratio was 0.096 times which can be regarded favorable
and denotes an effective management policy. The coefficient of variation
was 8.33 percent showing a consistent trend. It can be suggested that the
management of the company should continue with the same policy in
future also.
On the whole it can be said that the ratio of direct labour cost to
factory cost for all the companies under study showed a consistent trend
and per unit direct labour cost almost remained unchanged.. It denotes
an effective control over the direct labour cost and it is suggested that the
management of these companies should follow the same practice in
future also.

195
purpose t test has been applied by comparing one company with another
company.

direct labour cost to factory cost of RSWM and BSL.
Value of t = 9.12

of direct labour cost to factory cost of RSWM and BSL is significant.

direct labour cost to factory cost of RSWM and MSMUL.
Value of t = 6.32

of direct labour cost to factory cost of RSWM and MSUML is
significant.
196

direct labour cost to factory cost of RSWM and STIL.
Value of t = 2.369

of direct labour cost to factory cost of RSWM and STIL is significant.

direct labour cost to factory cost of BSL and MSUML.
Value of t = 14.21

of direct labour cost to factory cost of BSL and MSUML is significant.

direct labour cost to factory cost of BSL and STIL.
197
Value of t = 5.93

of direct labour cost to factory cost of BSL and STIL is significant.

direct labour cost to factory cost of BSL and STIL.
Value of t = 7.11

of direct labour cost to factory cost of MSUML and STIL is significant.
To test the significance of direct labour cost to factory cost ratio of

the companies under study F-test has been applied and following
hypotheses have been tested.

direct labour cost to factory cost ratio of the textile companies under
study.
198
Degree of Variance
(d.f.) /d.f)
F= 71.43
0.0090 (c-1)=(4-1)=3 0.003000
Error(SSE)
year-wise direct labour cost to factory cost ratio of the textile companies
under study.
Table 4.4
ANOVA TABLE

F= = = 71.43

= 12) is 3.49
labour cost to factory cost ratio of the textile companies under study is
significant.
(i) F-Test within the Companies

199
F= = = 1.79

= 12) is 3.26
Decision: Since the calculated value of F is less than the critical
Hypothesis is accepted and it is concluded that the year-wise difference
in the direct labour cost to factory cost ratio of the textile companies
under study is not significant.
3. Direct Labour Cost to Cost of Production

This ratio establishes the relationship between the direct labour cost
and cost of production. A lower ratio is always preferred provided that
the management has kept the per unit cost of direct labour cost intact
because the cost of production will be higher and accordingly the ratio
will be lower. In the present study the ratio of direct labour cost to cost
of production has been calculated by using the following formula-
Ratio of Direct Labour Cost to Cost of Production
Direct Labour Cost
=
Years Cost RSWM
of ProductionBSL MSUML STIL
2008-09 0.09 0.11 0.07 0.09
2009-10 0.08 0.12 0.07 0.10
2010-11 0.08 0.13 0.06 0.09
2011-12 0.08 0.12 0.06 0.08
2012-13 0.09 0.13 0.07 0.09
Average 0.0840 0.1220 0.0660 0.0900
S.D. 0.0049 0.0070 0.0049 0.0063
C.V.(%) 5.83 5.83 7.42 7.00
200
The ratio of direct labour cost to cost of production has been

presented in the following Table 4.5.
Table 4.5
Direct Labour Cost to Cost of Production Ratio
(From 2008-09 to 2012-13)
(Ratio in Times)
2012-13.
RSWM: It can be noted from the table that the ratio of direct labour
cost to cost of production in RSWM showed almost a consistent trend
during the period of study. During the year 2008-09 the ratio of direct
labour cost to cost of production was 0.09 which reduced to 0.08 times
in 2009-10 and remained unchanged in next two years and marginally
increased to 0.09 times in 2012-13. The average of the ratio was 0.0840
denoting a satisfactory position because the ratio remained unchanged
during the whole period of study except some marginal changes; though
the direct labour cost and cost of production had shown an increasing
trend during the period of study. The coefficient of variation was 5.83
percent denoting a consistent trend and it can be suggested that the
management of the company should follow the same policy in future
also.
BSL: From the table 4.5, it can be seen that the direct labour cost to
cost of production ratio in BSL showed an increasing cum consistent
trend during the period of study. The direct labour cost to cost of
production ratio during the year 2008-09 was 0.11 times which increased
201
to 0.12 times in 2009-10 and to 0.13 times in 2010-11. The ratio

decreased to 0.12 times in 2011-12 but increased to 0.13 times in
2012-13. The average of the ratio was 0.122 for the period of study
denoting a satisfactory position of direct labour cost management.
Despite an increasing trend of the production the ratio remained
consistent that denotes an effective control over the direct labour cost
expenditure because the per unit labour cost remained same. The
coefficient of variation was 5.74 percent denoting a consistent trend and
it can be suggested that the management of the company should try to
follow the same policy in future also.
MSUML: Table 4.5 reveals that similar to other companies the ratio
of direct labour cost to cost of production showed a consistent trend
throughout the period under study and the ratio fluctuated within the
range of 0.07 times to 0.06 times. The average of the ratio was .0660
denoting a favorable position of the company as regards the expenditure
on direct labour cost. The coefficient of variation was 7.42 percent
showing a consistent trend and it is suggested that the management of
the company should follow the same practice in future also because even
after the increase in the production the cost per unit of direct labour cost
has remained same denoting an effective control of the management.
STIL: The ratio of direct labour cost to cost of production in STIL

showed a fluctuating cum consistent trend during the period of study.
During the year 2008-09 the ratio was 0.09 times which increased to
0.10 times in 2009-10 but decreased to 0.9 times in 2010-11 and further
202
to 0.08 times in 2011-12. This ratio increased to 0.09 times in 2012-13.

The average of the ratio was 0.09 times denoting a favorable position of
the direct labour cost and it signifies an effective direct labour cost
management. The coefficient of variation was 7.00 percent showing a
consistent trend of the ratio. It can be suggested that the management of
the company should follow the same policy in future also.
An overall analysis of the ratio of direct labour cost to cost of

production amongst all the textile companies under study shows that
despite the increasing trend of the production the cost per unit of direct
labour cost remained same in all the companies during the period of
study which denotes an effective management and control over the direct
labour cost. The fluctuations were also negligible. It is suggested that the
management of these companies should continue with the same policy in
future also.
purpose t-test has been applied by comparing one company with another
company.

direct labour cost to cost of production of RSWM and BSL.
Value of t = 9.38
203

of direct labour cost to cost of production of RSWM and BSL is
significant.

direct labour cost to cost of production of RSWM and MSMUL.
Value of t = 5.80

of direct labour cost to cost of production of RSWM and MSUML is
significant.

direct labour cost to cost of production of RSWM and STIL.
Value of t = 1.69
Decision: The null hypothesis is accepted because the computed
value of t is less than the critical value of t at 5 percent level of
204
of direct labour cost to cost of production of RSWM and STIL is not

significant.

direct labour cost to cost of production of BSL and MSUML.
Value of t = 14.75

of direct labour cost to cost of production of BSL and MSUML is
significant

direct labour cost to cost of production of BSL and STIL.
Value of t = 7.55

of direct labour cost to cost of production of BSL and STIL is
significant.
205

direct labour cost to cost of production of BSL and STIL.
Value of t = 6.77

of direct labour cost to cost of production of MSUML and STIL is
significant.
To test the significance of direct labour cost to cost of production

ratio of the companies under study F test has been applied and following

direct labour cost to cost of production ratio of the textile companies
under study.
Degree of Variance
(d.f.) /d.f)
F= 1.03
0.07 (c-1)=(4-1)=3 0.0233
0.27 (c-1)(r-1)=12 0.0225 (Within Companies0
Error(SSE)
206

year-wise direct labour cost to cost of production ratio of the textile
companies under study.
Table 4.6
ANOVA TABLE

F= = = 1.03

= 12) is 3.49
Hypothesis is accepted and it is concluded that the difference in the
direct labour cost to cost of production ratio of the companies under
study is not significant.

F= = = 1.12
Critical value of F at 5 percent level of significance (V1 = 12 and

V2 = 4) is 5.91

207
Hypothesis is accepted and it is concluded that the year wise difference

in the direct labour cost to cost of production ratio of the companies
under study is not significant.
4. Direct Labour Cost to Cost of Sales
This ratio shows the proportion of direct labour cost towards the
cost of sales. The ratio of direct labour cost to cost of sales has been
calculated by using the following formula-
2008-09 0.08 0.12 0.07 0.09

2009-10 0.08 0.12 0.07 0.11
2010-11 0.08 0.13 0.06 0.09
2011-12 0.08 0.13 0.06 0.09
2012-13 0.09 0.13 0.07 0.09
Average 0.082 0.126 0.066 0.094
S.D. 0.004 0.005 0.004 0.008
C.V.(%) 4.88 3.97 7.42 8.51
Direct Labour Cost

Ratio of Direct Labour Cost to Cost of Sales =
Cost of Sales
The direct labour cost to cost of sales ratio of the textile companies
under study has been shown in the following Table 4.7.
Table 4.7
Direct Labour Cost to Cost of Sales Ratio
(From 2008-09 to 2012-13)
(Ratio in Times)
2012-13.
208
RSWM: The above Table 4.7 shows that the ratio of direct labour
cost to cost of sales in RSWM showed a consistent trend during the
whole period of study except in the year 2012-13. The ratio of direct
labour cost to cost of sales remained constant at 0.08 times during the
first four years of study and marginally increased to 0.09 times in
2012-13. The consistency of the ratio shows that per unit cost of direct
labour remained same irrespective of production. The average of the
ratio was 0.82 times denoting a satisfactory position which should be
continued in future also. The coefficient of variation was 4.88 percent
showing a consistent trend which should be maintained.
BSL: As depicted by Table 4.7, it can be said that the direct labour
cost to cost of sales ratio in BSL showed a consistent trend during the
whole period of study. Initially during the year 2008-09, the ratio was
0.12 times which remained same in 2009-10 and marginally increased to
0.13 times in 2010-11 and remained unchanged up to the last year of
study. The consistent trend of the ratio shows that the relationship of per
unit cost and direct labour cost was intact during the whole period of
study. The average of the ratio was 0.126 times which can be regarded
satisfactory. The coefficient of variation was 3.97 percent denoting a
consistent trend and it can be suggested that the management of the
company should follow the same policy in future.
MSUML: The ratio of direct labour cost to cost of sales ratio in
MSUML showed a consistent trend during the period of study like other
companies under study. During the year 2008-09 the direct labour cost to
cost of sales ratio was 0.07 times which remained same in the following
209
year but decreased to 0.06 times in 2010-11 and remained same in

2011-12. This ratio again marginally increased to 0.07 times in 2012-13.
The average of the ratio was 0.0660 denoting that the proportion of
direct labour cost was very low which shows that the company followed
an effective control policy for the direct labour cost which should be
followed in future also. The coefficient of variation was 7.42 percent
denoting a consistent trend which should be maintained in future also.
STIL: The direct labour cost to cost of sales ratio in STIL showed a
consistent trend during the whole period of study except in the year
2009-10. During the whole period of study the ratio of direct labour cost
to cost of sales was intact at 0.09 times except in the year 2009-10 when
it was 0.11. The average of the ratio was 0.094 times which is though
very low but can be regarded in favour of the company. The coefficient
of variation was 8.51percent denoting a consistent trend and it can be
inferred that the management should continue with the same policy in
future also.
An overall comparison of the ratio of direct labour cost to cost of

sales amongst all the textile companies under study reveals that the
proportion of direct labour cost to sales was low and remained consistent
throughout the period of study. Lower proportion of direct labour cost
signifies that there is no problem of labour in textile industry and
workers are easily available at cheaper rate. However, it denotes a good
management and it is suggested that the same policy should be
continued by the management of these companies under study.
210
purpose t test has been applied by comparing one company with another
company.

direct labour cost to cost of sales of RSWM and BSL.
Value of t = 15.45

of direct labour cost to cost of sales of RSWM and BSL is significant.

direct labour cost to cost of sales of RSWM and MSMUL.
Value of t = 5.62
Critical Value of t at 5 percent level of significance (for V=8) is

2.306

211
of direct labour cost to cost of sales of RSWM and MSUML is

significant.

direct labour cost to cost of sales of RSWM and STIL.
Value of t = 3.01

of direct labour cost to cost of sales of RSWM and STIL is significant.

direct labour cost to cost of sales of BSL and MSUML.
Value of t = 19.35

of direct labour cost to cost of sales of BSL and MSUML is significant.

212

direct labour cost to cost of sales of BSL and STIL.
Value of t = 7.55

of direct labour cost to cost of sales of BSL and STIL is significant.

direct labour cost to cost of sales of BSL and STIL.
Value of t = 6.70
of direct labour cost to cost of sales of MSUML and STIL is significant.
Degree of Variance
(d.f.) /d.f)
F= 71.43
0.009 (c-1)=(4-1)=3 0.003000
Error (SSE)
213
To test the significance of direct labour cost to cost of sales ratio of

the textile companies under study F-test has been applied and following
direct labour cost to cost of sales ratio of the companies under study.
year-wise direct labour cost to cost of sales ratio of the companies under
study.
Table 4.8
ANOVA TABLE

F= = = 71.48

= 12) is 3.49
labour cost to cost of sales ratio of the textile companies under study is
significant.

F= = = 1.68
214
Critical value of F at 5 percent level of significance (V1 = 12 and

V2 = 4) is 5.91

Hypothesis is accepted and it is concluded that the difference in the
year-wise direct labour cost to cost of sales ratio of the textile
companies under study is not significant.
*****

Accounting of Labour and Cost Control: Chapter-4

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Accounting of Labour and Cost Control: Chapter-4

Caricato da

Copyright:

Formati disponibili

Chapter-4

ACCOUNTING OF LABOUR AND COST

Meaning and Concept of Labour Cost

MEANING AND CONCEPT OF LABOUR COST

Labour constitutes an important element of the total cost of

as a very important part of the organization, in modern labour

Industrial undertakings used to engage the following different type

labours who have been engaged on temporary basis as and when

Workers of all categories are classified into skilled labour and

DIRECT AND INDIRECT LABOUR COST

(1) Direct Labour Cost

Idle Time : Machine beak downs, materials shortages, power

Overtime Premium: The overtime premium paid to all factory

(2) Indirect Labour Cost

Indirect labour is for work in general. The importance of the

has, therefore to be treated as part of the factory overheads to be

CONTROL OF LABOUR COST

Control of labour cost is a significant influence on the growth,

Labour cost may become unduly high due to inefficiency of labour,

In order to achieve the effective utilization of manpower resources,

3. Shah Parvin, “Cost Control and Information System”, p.197.

ORGANISATION FOR CONTROL OF LABOUR COST

The following are the important departments for control over

(1) Personnel Department

(2) Engineering and Works Study Department

Engineering department is primarily concerned with maintaining

It is performed by undertaking the following functions :

(1) Preparation of plan and specification of each job.

(2) Maintaining required safety and efficient working conditions.

(3) Making time and motion studies.

(4) Conducting job analysis, job evaluation and merit rating.

(6) Conducting research and experimental work.

In order to maintain control over working conditions and

(a) Method Study: It is one of the important components of work

(b) Motion Study: Frank Gilbreth, who is the real founder of

The following are the important objectives of the motion study:

(1) Effective ut1isation of material, machine and labours.

(2) Elimination of wastage of time and labours.

(3) Maintaining higher standards of safety and health.

(4) Reducing unnecessary movements in order to minimize

(5) Better design of work place layout for effective production

(6) Ensure fair remuneration with job satisfaction.

Uses of Time Study are following:

(d) Job Analysis: Job Analysis is a formal and detailed study of

(1) It is useful in classifying job and interrelationship among

(2) If facilitates forecasting of manpower requirements.

(4) Effective employee development programme can be

purpose of job evaluation is to develop appropriate wage and salary

(3) Time Keeping Department

(1) Preparation of payrolls

(2) Ensuring discipline in attendance

(3) Apportionment of overhead on the basis of labour hours

(4) Effective utilization of human resources

(5) Minimization of labour costs

(1) Manual Method:

(2) Mechanical Method:

(b) Token or Metal Disc Method: In this method, each worker is

Mechanical Method: In order to achieve the accuracy and reliability

(a) Time Recording Clocks

(b) Dial Time Records: This is a machine which is used for

(5) Waiting time for getting instructions, tools and or raw

Abnormal Idle Time