Labour Cost Labour Cost - Control

Direct Indirect
Direct Indirect
It is variable so it can be It is not variable so it requires
Cost of all labour Cost related to labour
easily controlled attention by Establishment of
expended in altering who are not so directly Suitable Budget Dept. wise and
the construction, engaged in altering the comparison of actual with standard.
composition or construction,
condition of the composition or -Production Planning
product condition of the -Use of Labour Budget
Directly Allocable product -Use of Labour Standard
-Effectiveness of wage incentive
Varies directly with Apportionment of OH schemes
volume of output -Labour performance report
Not Variable
Dr. Ratnesh Chaturvedi, COMA, Session – 7-8 Dr. Ratnesh Chaturvedi, COMA, Session – 7-8
-Labour Cost Accounting

Labour Cost Control – Different Functional Activities

Labour Turnover : Loss of employment High Cost
in an organisation Low Productivity
Personnel Dept.

Time Keeping Dept. Causes of Labour Turnover :

Payroll Dept. Avoidable Causes Unavoidable Causes

-Redundancy Personal Betterment

Dissatisfaction with job, Illness or Accident
Engg. & Work Study remuneration, hours of work,
Move from locality
Dept. working conditions,
Retirement or death
Relationship with seniors and
Cost Acctg. Dept. subordinates
Personnel Policies
Dr. Ratnesh Chaturvedi, COMA, Session – 7-8
Dr. Ratnesh Chaturvedi, COMA, Session – 7-8

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 Measurement of Labour Turnover : Illustration - Measurement of Labour Turnover :

Separation Method : No. of Separations in a period x 100 / Avg. During Apr’05 the following information is obtained from the
no. of workers in the period Personnel Dept. of a manufacturing concern :
Labour force at beginning of the month 950 and 1050 at the end
Replacement No. of Replacements in a period x 100 / of the month. During the month 10 persons quit while 30
Method : Avg. no. of workers in the period persons are discharged. 140 workers were engaged – out of
which only 20 persons appointed in the vacancy created by the
½ (No. of Separations + No. of number of workers separated and the rest on account of an
Flux Method : expansion scheme.
Replacements) x 100 / Avg. no. of workers
Calculate the labour turnover rate.

Dr. Ratnesh Chaturvedi, COMA, Session – 7-8 Dr. Ratnesh Chaturvedi, COMA, Session – 7-8

No. of Separations in a period x 100 / Avg. no. of Replacement Costs

Separation Method : Cost of Labour Turnover :
workers in the period
= 40 x 100 / (950+1050)/2 = 4% Inefficiency of new labour
Preventive Cost Cost of selection and placement
EALT Rate = 4 x 365 / 30 = 49.67%
Training Costs
Cost of personnel admn.
Replacement Method : No. of Replacements in a period x 100 / Avg. no. of Loss of output
workers in the period Cost of medical services
Increased spoilage
= 20 x 100 / (950+1050)/2 = 2% Cost of welfare services Accident frequency
EALT Rate = 2 x 365 / 30 = 24.33% Pension schemes Cost of tools & machine breakages

½ (No. of Separations + No. of Replacements) x

Flux Method : If due to fault of a particular dept.
100 / Avg. no. of workers Should be apportioned to different
charge against that dept.
departments in proportion to the
= ½ ( 40+20) x 100 / (950+1050)/2 = 3% number of persons engaged in each Otherwise apportioned to different
EALT Rate = 3 x 365 / 30 = 36.5% dept. departments in proportion to the
number of persons engaged in each
Dr. Ratnesh Chaturvedi, COMA, Session – 7-8 dept.
Dr. Ratnesh Chaturvedi, COMA, Session – 7-8

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 LABOUR PRODUCTIVITY Remuneration & Incentives

When output is uniform : Remuneration is total monetary earnings of employees. It

consists of earnings according to time or on piece rate and
Productivity is the index of
LP = Output / Actual Hrs. includes other financial incentives.
efficiency showing the
effectiveness of the
individual or combined In Fixing Remuneration following considerations are
When output consists of different
factors used in producing important :
types of products consuming
goods or services.
different amount of time : -The wages paid to employees of same type of organisation
Generally it is the ratio
between output and input. LP = Prdn. In Standard Hrs. / -The ability of the employers to pay
Actual Hrs. Worked
-The needs of employee – Standard of living
Dr. Ratnesh Chaturvedi, COMA, Session – 7-8 Dr. Ratnesh Chaturvedi, COMA, Session – 7-8

Principles Applicable to all Incentive Schemes

Remuneration & Incentives
Why Incentive Scheme ?????? Remuneration Systems
-To increase the volume of production
Time Rates Piece Rates Bonus Indirect Non-
-To improve or at least maintain, the quality of product Systems monetary monetary
incentives incentives
-To reduce the cost of production, and
-At Ordinary -Straight -Individual -Profit Welfare –
-To raise morale and increase efficiency of staff Levels Piece Rates bonus for direct Sharing Health,
workers Sports, etc.
-At High -Piece-rates -Co-
wage levels with -Group bonus partnership
Factors in An Incentive Scheme : guaranteed for direct
-Graduated
day rates workers
1. Productivity 2.Effect on Workers 3. Incidence of fixed Time Rates
OH -Differential -To indirect
piece rates workers
Dr. Ratnesh Chaturvedi, COMA, Session – 7-8 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

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 -At Ordinary Differential 1. Taylor 2. Merrick 3. Gantt task & Bonus
Earnings = Hrs. Worked x Rate /Hr.
Levels Piece Rates

Time Rates -At High More than above i.e. with incentive
wage levels 1. Taylor Differential Piece Rate System – Not Popular & modified by Gantt & Merrick

-Graduated Adjusted time rate w.r.t. cost of living Two Piece Rates :
Time Rates index High Piece Rate – for output above standard (150% of low rate)
Low Piece Rate – for output below standard
-Straight Earnings = No. of units x Rate/unit
Piece Rates Or, Std. Hrs. of work produced x Rate per std. 2. Merrick Differential Piece Rate System – Modification of Taylor System
Hr.
-Piece-rates Three Rates :
Piece Rates with
guaranteed Earnings = Guaranteed time rate plus a piece Output percentage Standard Payment
day rates rate payment for output above a stated minimum a) Up to 83% Ordinary Piece Rate
-Differential b) 83% to 100% 110% of Ordinary PR
piece rates c) Over 100% 120% of Ordinary PR
Dr. Ratnesh Chaturvedi, COMA, Session – 9-10 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

Differential 1. Taylor 2. Merrick 3. Gantt task & Bonus Differential 1. Taylor 2. Merrick 3. Gantt task & Bonus
Piece Rates Piece Rates

Illustration: The following is the output of workers A, B and C in a particular 40 hour

3. Gantt task & Bonus Plan : Combined time, bonus & piece rate week :
Three Rates : A – 64 units, B – 74 units and C – 84 units
Output Payment Guaranteed time-rate Rs. 5 / hour
a) Output below standard (High Task) Time Rate (Guaranteed) Low Piece Rate – Rs. 2 per unit, High Piece Rate – Rs. 3 / unit, High task 80 units / week
b) Output at standard Bonus @ 20% of the Time Rate
c) Output over standard High Piece Rate on worker’s Table Showing Earnings and Labour Cost Per Unit
whole output Worker Output / % of Task Taylor System Merrick System Gantt Task System
Week (80Units) Earnings Cost/unit Earnings Cost/unit Earnings Cost/unit

A 64 80 128 2 128 2 200 3.125

B 74 92.5 148 2 162.8 2.2 200 2.70
C 84 105 252 3 201.6 2.4 252 3

Dr. Ratnesh Chaturvedi, COMA, Session – 9-10 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

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 Bonus Individual bonus ILLUSTRATION :
Systems System

Premium Bonus System is an incentive system in which the gain resulting from the During one week the workman X manufactured 200 articles. He
increased output is shared between the employer and employees in agreed
receives wage for a guaranteed 44-hour week at the rate of Rs.
proportions. The premium bonus to be paid is calculated on the hours saved I.e. on
the difference between the time allowed and the time taken.
15/hour. The estimated time to produce one article is 15 minutes
and under incentive scheme the time allowed is increased by 20%.
Calculate his gross wages under each of the following methods of
1. Halsey Premium Plan Under a 50-50 sharing
remuneration :
Earning = Hrs. Worked x Rate per Hr. + 50 / 100 (Time
Allowed – Hrs. Worked) x Rate per A. Time Rate B. Piece-work with a guaranteed
weekly wage
2. Halsey Weir Premium
Same as above C. Rowan Premium Bonus D. Halsey Premium bonus, 50 %
System
to workman
Earning = Hrs. Worked x Rate per Hr. + Time Saved /
3. Rowan System
Time Allowed x Hrs. Worked x Rate per Hr.
Dr. Ratnesh Chaturvedi, COMA, Session – 9-10 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

A Time Rate E = HW x RH = 44 x 15 660

B Piece Rate E = NU x RU = 200 x 4.50 900

4. Barth Variable Sharing
Plan Earning = Rate per Hour x Standard Hrs x Act. Hrs. worked
NU = 200
Time for one unit = 15 + 15x20/100 = 18 mins. 5. Emerson Efficiency Earning = Hours worked x Rate per Hour + Emerson Bonus
Rate per minute = Rs.15 / 60 = Re.0.25 Bonus percentage x Hours worked x Rate per hour
RU = 18 x 0.25 = Rs.4.50 = HW x RH + (E.B.P./100) x HW x RH

C Rowan Premium Bonus: Schedule of Bonus

E = HW x RH + (TA - HW)/TA x HW x RH
Efficiency Bonus
= 44 x Rs.15 + (60-44)/60 x 44 x 15 i) Below 66.67% efficiency No bonus, only time rate wages
= Rs. 836
ii) 66.67% to 100% A bonus at first very small but increasingly rapidly to
D Halsey Premium Bonus (50-50 sharing) 20% above basic wages on 100% efficiency
E = HW x RH + (50 x (TA - HW) x RH) / 100 iii) Over 100% A bonus of 20% above basic wage plus 1% for each 1%
increase in efficiency
= 44 x Rs. 15 + (50 x (60-44) x 15) / 100
= Rs. 780 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

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 ILLUSTRATION : ILLUSTRATION :
Standard time allowed for a job is 10 hours and hourly rate is From the following information calculate the bonus and earning
Rs.10 for each worker. Actual time taken by worker A 12 hours, under Emerson efficiency bonus :
worker B 10 hours and worker C 8 hours. Calculate the total
Standard Output in 10 Hours - 120 units
earnings and earning per hour under the Barth variable sharing
plan. Actual Output in 10 Hours - 132 units
Time Rate - Rs. 10/Hour
Computation of Earnings :
Worker Total Earning (Rs.) Earnings per hour (Rs.) Efficiency Percentage = 132 x 100 / 120 = 110%

A 12 x 10 x 10 = 34.64 =34.64 / 12 = 2.89 Bonus Percentage = 20 + (110-100) x 1 = 30%

B 10 x 10 x 10 = 31.62 =31.62 / 10 = 3.16 Bonus = (30/100) x 10 x Rs. 10 = Rs. 30

C 8 x 10 x 10 = 28.28 =28.28 / 8 = 3.54

Earnings = 10 x Rs. 10 + (30/100) x 10 x Rs. 10 = Rs. 130

Dr. Ratnesh Chaturvedi, COMA, Session – 9-10 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

Group Bonus System – In many cases output of individuals Indirect Monetary Incentives –
can not be measured but output of group of workers can be
i) Profit Sharing – In profit sharing schemes there is an agreement
conveniently measured. The total bonus determined according to between the employer and his workers whereby the employer pays
productivity can then be shared equally, or between workers of them, in addition to wages, a predetermined share of the profits of the
differing skills in different specified proportions. undertaking.
i) Budgeted Expense Bonus – Bonus is based on the savings in ii) Co-partnership – In co-partnership or co-ownership scheme
employees get the opportunity to share in the capital of the business
actual total expenditure compared with the total budgeted and to receive the part of profits that accrue to their share of
expenditure. ownership.
ii) Cost Efficiency Bonus – Bonus paid for the reduction either of Non Monetary Incentives –
total cost or of specific element of cost. i) Education & Training,
iii) Priestman System – Bonus based on achieving certain ii) Health & Safety
standard. iii) Canteen
iv) Waste Reduction Bonus – This system provides incentive to
workers with a view to reducing material waste to a minimum.
Dr. Ratnesh Chaturvedi, COMA, Session – 9-10 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

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 OVERHEAD PROCEDURE OF LINKING OF OVERHEAD
Classification Based on some scientific and consistent
Indirect Indirect Indirect and Collection basis, collection in different headings
Material Wages Expenses of Overhead (groups) as suitable to organisation and
on regular basis.
Allocation & Main sources from which OH are
Function Variability Normality Controllability Apportionment collected regularly:
of Overhead 1. Stores Requisition
Prodn. OH Fixed OH Normal OH Controllable 2. Invoices
Admn. OH Variable OH Abnor. OH Uncontrollable Absorption of 3. Wages Analysis Book
Selling OH SV OH Overhead 4. Journal Entries
Distri. OH 5. Cash Book
6. Other Registers and Reports
Dr. Ratnesh Chaturvedi, COMA, Session – 9-10 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

PROCEDURE OF LINKING OF OVERHEAD PROCEDURE OF LINKING OF OVERHEAD

Classification Allocation – If the cost is directly Classification Common OH Distribution Bases
traceable then it can be directly 1.Canteen Exp., Time Keeping, No. of Employees or wages
and Collection allocated to the particular cost centre and Collection
of Overhead or service centre. of Overhead
General Welfare Exp., for each Dept.
Compensation and Other Fringe
Apportionment – If cost is directly not
traceable then case of apportionment Benefits, and ESI Contribution of
Allocation & on some suitable basis to the cost Allocation & Employer
Apportionment centre and service centre. Apportionment 2. Depreciation of Plants, Capital Values
of Overhead e.g. Rent, Electricity charges, Telephone of Overhead Machinery and equipments,
charges for the entire works
Fire Insurance
3. Electric Light No. of Light Points, Floor Space,
Absorption of For determination of suitable basis: Absorption of
Hours Used, meter readings
Overhead i) Service or use Overhead 4. Delivery Expenses Weight, Volume, Tonne-Km
5. Audit Fees Sales or Total Cost
ii) Survey Method
iii) Ability to method
Dr. Ratnesh Chaturvedi, COMA, Session – 9-10 Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

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The following figures are extracted from the accounts of a
manufacturing concern for the month of Sep'05:
Indirect Materials Rs. Items Prdn. CC Service CC Primary Distribution Summary
Production Dept. P1 950 P1 P2 P3 S1 S2
Items Basis of Total Prdn. CC Service CC
Production Dept. P2 1200 Area (sq. m.) 4000 4000 3000 2000 1000
Production Dept. P3 200 Assets Value 100000 120000 80000 60000 40000 Apportionment P1 P2 P3 S1 S2
Maint. Dept. S1 1500 Kilowatt Hours 4000 4400 1600 1500 500
Indirect Material Allocation 4250 950 1200 200 1500 400
Stores Dept. S2 400 No. of Employees 90 120 30 40 20
Indirect Wages Rs. Indirect Labour Allocation 3950 900 1100 300 1000 650
Production Dept. P1 900
Power & Light Kilowatt Hours 6000 2000 2200 800 750 250
Production Dept. P2 1100
Production Dept. P3 300 Depreciation Value of assets 2000 500 600 400 300 200
Maint. Dept. S1 1000
Insurance Value of assets 1000 250 300 200 150 100
Stores Dept. S2 650
Power and Light 6000 Rent & Rates Sq. m. 2800 800 800 600 400 200
Insurance on Assets 1000
Rent & Rates 2800 Meal Charges No. of Employees 3000 900 1200 300 400 200
Meal Charges 3000
Depreciation 6% on capital value of assets, p.a.. From the
Total 23000 6300 7400 2800 4500 2000
above prepare a primary distribution summary with the
following primary departmental data: Dr. Ratnesh Chaturvedi, COMA, Session – 9-10
Dr. Ratnesh Chaturvedi, COMA, Session – 9-10