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LABOUR COSTS

Presented By:

7.Darpan Batra

21.Rikita Gujral

23.Sonika Gupta

38.Devang Mehta

39.Anand Menon

41.Upasana Nagpal

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′lā·bər ′köst

• Wages paid to workers during an accounting period on daily, weekly, monthly, or job basis, plus payroll and related taxes and benefits (if any).

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The Manager’s Thought

Prime cost of concern for the HRD

Important part of production

process

Decides price of product

LABOUR COST IS:

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Labour Costs

Direct

That portion of wages or salaries which can be

identified & charged to a single costing unit

Indirect

Cannot be correlated with production of specific goods, applicable to mfg activities

generally (paid to foreman,stockkeeper,clerical

staff)

CLASSIFICATION

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Other Benefits

• Employees contribution to PF, production & profit bonus, holiday & vacation bonus, old age pension

Financial

• Subsidised food & housing, transport to the workplace,employee’s children education , recreational facilities etc.Non-

financial

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System of wages

• Should satisfy employees & employer

System of wages

Time Wage or Day Rate

Piece Rate or Piece Work

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Time Wage or Day Rate system

• Wages to worker are paid on time basis irrespective of quantum of production

• Wage measured on basis of unit of time, i.e., hourly, daily, weekly or monthly

• Formula:

SUITABILITY :Volume of production is not within the control of labor. E.g. Oil Refinery

• The nature of work is such that there is no basis for incentive plan. E.g. Night watchman

Hrs worked X Rate per Hr

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Piece Rate or Piece Work

• Remuneration of work is paid on the basis of production and not time taken by to perform the work

• Simple and most commonly used incentive schemes• Formula:

SUITABILITY : • If the productivity is closely related to skill & efforts• The unit cost can be easily determined • If it is possible to fix a fair and acceptable piece rate

Units Produced X Rate per Unit

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Avg Labour cost/manday worked

(state wise)2003-04

Chandigarh : Rs.592.16 Jharkhand: Rs 567.99 Manipur : Rs.77.69

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Labour costs ( industry wise)2003-2004

Rs.1080.84

•Manufacture of refined petroleum products

Rs.888.7

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•Manufacture of motor vehicle

Rs.87.65

•Agriculture and animal husbandry activities

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Advantage India

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CALCULATION OF WAGES RATES FOR COSTING PURPOSES

Q: Calculate labour cost per man- day of 8 hours from the following particulars:

(i) Basic Salary Rs. 4 per day

(ii) Dearness Allowance 25 paise per every point over 100 cost of living index for working class. Current cost of living index is 500 points

(iii) Leave Salary 10% of (i) and (ii)

(iv) Employer’s contribution to provident fund

8% of (i), (ii) and (iii)

(v) Employer’s contribution to E.S.I

2.5 % of (i),(ii) and (iii)

(vi) Expenditure on amenities to labour

Rs. 20 per head per month

(vii) Number of working days in a month

25 days of 8 hours each

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Solution:

Calculation Rs.

(i) Basic Salary = 4.00 4.00

(ii)Dearness Allowance(cost of living index- 500 points for a month of 25 days)

= 400 × 0.25= 100=> 100/25= 4 4.00

(iii) Leave Salary( 10% of (i) and (ii))

= (10/100) × (4+4)= 0.1 × 8= 0.80

0.80

(iv)Employer’s contribution to provident fund( 8% of (i), (ii) and (iii))

= (8/100) × (4+4+0.80)= 0.08 × 8.80 = 0.704 0.70

(v) Employer’s contribution to E.S.I( 8% of (i), (ii) and (iii))

= (2.5/100) × (4+4+0.80)= 0.025 × 8.80

0.22

(vi) Expenditure on amenities to labour ( Rs.20 per head per month)

= 20/25 = 0.80 0.80

Total 10.52

Why Control labour costs?

• Inefficiency of labor• Wasting material due to improper supervision• Idle time – normal & abnormal causes.• Unusual overtime work• Inclusion of dummy names in payrolls, etc

Controlling accomplished by:

Personnel department

Rate or time & motion study

Production planning

Budgeting

Engineering department

Time - keeping

Cost accounting department

Payroll department

OTHER COSTS

• Idle time • Overtime• Bonus & premiums• Incentive wage plans• Group bonus schemes• Co –partnership schemes

Treatment of Idle Time Cost

• Treatment of normal idle time cost

(i) Treated as direct wages

(ii) Treat as an item of factory expenses and recover as indirect charges

• Treatment of abnormal idle time cost

(i) Does not form part of cost of production

(ii) Directly transferred to Costing Profit & Loss Account without disturbing the normal costs

ELIMINATE ABNORMAL CAUSES & MINIMIZE NORMAL ONES

Overtime & its treatment

• Time spend over & above the normal working hours on the job

• In India, if worker works more than 9hrs a day or 48 hrs a week.

I. Direct cost- customer pays due to urgency

II. P/L A/c- to makeup any shortfall in production due to some fault of management or due to abnormal causes like floods

III.General overhead- when handling seasonal pressures

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Q: Calculate the normal and overtime wages payable to a

workman from the following data:

DaysHours

worked

Monday 8 hours Normal working hoursNormal rate:

8 hours per day ,Re 0.50 per hour. Up to 9 hours in a day at single rate and over 9 hrs a day at double rate or upTuesday 10 hours

Wednesday 9 hours

Thursday 11 hours Overtime Rate: 48 hours in a week at single rate and over 48 hours at double rate , whichever is more beneficial to workman Friday 9 hours

Saturday 4 hours

51 hours

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DayNormal

Working Hours

Total Normal Rate

Overtime

Single Rate

Double Rate

Monday 8 8 8

Tuesday 8 10 8 1 1

Wednesday 8 9 8 1

Thursday 8 11 8 1 2

Friday 8 9 8 1

Saturday 8 4 4

48 51 44 4 3

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Normal wages on time rate = 44 hours x Rs.0.50 = Rs.22.00

Overtime wages: Single Rate = 4 hours x Rs. 0.50 =Rs. 2.00

Double Rate = 3hours x Re 1.00 = Rs. 3.00

Total wages = Rs. 27.00

If payment is made on weekly basis, then:

Hence, in both the cases total wages payable to the worker = Rs. 27.00

Normal Wage for 48 hours = 48 hours x Rs. 0.50 = Rs. 24.00

Overtime payable at double rate ( 51 hours- 48 hours) = 3 hours x Re. 1.00 =Rs. 3.00

Total Rs. 27.00

Bonus and premium schemes

•To increase the production and productivity•To raise the morale•To retain the services of good workers•To establish better labor-management relations

Group bonus schemes•To develop team spirit •Where output is more dependent upon the efforts on the group rather than

the individual worker.• METHODS

•Equally by all workers in the group.•Pro rata on the time rate basis. •Predetermined percentage basis.•Specified proportion basis depending upon the different skills of the

workers.

Co-partnership / shares•Provide an opportunity to workers to share the prosperity of the company

by not only being the wage earner but also the partner of the undertaking.•The profits to be distributed are determined through the negotiation between

the employer and the employee.•Normally it is paid in cash, but it may be in the form of shares of the

undertaking.

Types of incentive wage plans

1. Halsey premium plan

2. Halsey- weir premium system

3. Rowan plan

4. Bedaux point premium system

5. Taylor’s differential piece rate system

6. Merrick differential piece rate system

7. Gantt task & bonus plan

8. Emerson efficiency system

TYPES OF INCENTIVE WAGE PLANS

Halsey Premium Plan

• The worker is paid a % of the time saved over the standard rate per piece.

• Standard time is fixed for each job/operation• If the labour completes at standard time or more he is given the

standard price.• If time saved- wages given for actual hours saved as a bonus.

Time taken* rate + %(standard time-time taken)* rate

Cont…

Rowan System

The bonus hours are calculated as the proportion of the

time taken which the time saved bears to the standard time allowed

Time taken* rate + standard time – time taken* time taken* rateStandard time

Question ???

Time allowed (standard time): 60 hrs.Rate of wages: Rs10 per hour

Factory A

Halsey PlanRowan Plan

Factory B

Time taken =48hrsTime taken =36hrs

Required: Total earnings according to both the systems

The formula of calculating wages by Halsey premium method and Rowan’s method are as follows:

Time taken* rate + %(standard time-time taken)* rate

Time taken* rate + standard time – time taken* time taken* rateStandard time

Wage at location A: 36 *10= 360 RsWage at location B: 48 * 10=480 Rs

Bonus : 60-36 * 36 *10= 144 Rs 60

Location A

Bonus : 50% time saved * rate per hr=50% (60-48) * 10=60 Rs

Location B

‘A’(Rowan’s method)

Rs.

‘B’(Halsey’s method)

Rs.

Wages:Bonus:

360144

48060

Total: 504 540

Merrick Differential Piece Rate System

• Has 3 categories for payment

• Daily wages are not guaranteed.

20% above Normal rate

Above 100%

10% above Normal rate

Up to 100%

Normal rateUp to 83%

Price rate applicable

Efficiency

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Methods of measuring workforce performance

– Labour turnover

– Labour productivity

– Absenteeism

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Labour turnover

• Labour turnover (staff turnover) can be defined as the rate of change in a firm’s labour force.

• look at labour turnover over a period of 1 year.

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Turnover and costing

Labour turnover

( High / Low )

Preventive costsCosts incurred to keep turnover as low as possible

Replacement costs

Costs due to replacement of

employees

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Calculation Methods

1.Separation method:• no.of separations in a period/avg total no.of

workers in a period * 100

2.Flux or separation cum replacement method:• No. of separation+ no.of replacement/ avg total

no.of workers in a period *100

3.Replacement method:• No.of workers replaced during a period/avg total

no.of workers* 100

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QUESTION :The personnel dept has supplied the following info:

June 1st 2008 – 1900

June 30th 2008 – 2100

During the month, 60 persons were discharged and 20 left the company. During the month 200 workers were engaged out of which only 40 were appointed against the vacancy caused by the number of workers separated and the remaining on account of an expansion scheme of the company.

Calculate labour turnover rate & equivalent rate under diff. schemes.

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Avg no. of workers = 1900 + 2100 / 2 = 2000

Separation method

• LTR = 80 * 100 / 2000

• = 4 %• Eqvlnt annual

turnover rate = 4 * 365 / 30 =48.67 %

Flux method

• LTR= 80 + 40 / 2000 * 100

• = 6%• Eqvlnt annual

turnover rate = 6 * 365 /30

• = 73 %

Replacement method

• LTR = 40 * 100 / 2000

• = 2%• Eqvlnt annual

turnover rate = 2 * 365 /30 = 24.33 %

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Labour Productivity

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Labour productivity

Output per worker

=Total value of Output

Total Number of workers

• Look at labour productivity over a period of time e.g. 1 year

Cost per unit

= Total Labour Cost

Number of units produced

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Labour Absenteeism

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Absenteeism

• Defined as the number of staff who miss work as a proportion of the total number of staff

Number of staff absent per time period x 100

Total number of staff days worked per time period Look at absenteeism over a period of time e.g. 1 month

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Preparation of Pay Rolls or Wage Sheets

• Responsibility of The wages or payrolls department

• Wages are calculated from any of the previous methods.• The wage sheets are prepared department-wise as they

help in budgeting

Collection of basic data

Calculation of wages payable

Preparing an actual payroll

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• Prepared either fortnightly or monthly.• Main purpose is to classify the labor cost into direct or indirect and for each job or cost center.

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Cost accounting

dept

Cost Analysis sheet

Wages abstract

Wages analysis

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PEPE Jeans Co. Ltd.Wages Abstract

Period Ending:.............

Department or Shop

Production Order no.

Job Card No.

Hours or Pieces

Rate per hour/ piece

Labor Cost

PEPE Jeans Co. Ltd.Wages Analysis

Period Ending:…….

Department

Total Wages

Direct Wages

Factory Overhead

Adm. Overhead

S&D Overhead

Deductions

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THANK YOU