Labour
Areas To Be Covered:
• Recording Of Labour Cost
• Labour Remuneration Methods
• Overtime And Overtime Premium
• Recording Of Labour Cost (Documentation And Procedure)
• Performance Measurement Of Using Standard Hours
• Bonus Scheme
• Labour Turnover
• Accounting For Labour Cost
Definition
Labour represents the human contribution to production.
Classification of Labour Cost
• Direct Labour Cost
• Indirect Labour Cost
Direct Labour Cost
Direct Labour Cost can be specifically traced to or identified with a
particular product/service. They are directly involved in making a
product.
Example:
• Wages of operative assembling parts into finished products.
• Machine operatives engaged in production process.
Indirect Labour Cost
Indirect Labour Cost not charged directly to a product.
Example:
• Instructor’s salary and supervisor’s salary.
• Maintenance worker’s salary.
Recording Labour Cost
Several departments are involved in the collection, recording and
costing of labour.
These include:
• Personnel
• Production planning;
• Timekeeping: responsible for recording the attendance time and
the time spent in the factory and spent on particular job by each
employee
Recording Labour Cost
• Payroll: Labour costs paid to employees according to records
• Cost accounting
Records showing how each employee's pay has been calculated
are known pay-slips.
Documentation – Labour Cost
Employee Record Card: It contains the basic information concerning
an employee. It is raised when the employee is engaged and shows
a history of progress through the firm, for example date of joining firm,
rate of pay, promotion, training, departments in which experience
has been gained, records of sickness, absenteeism, etc. When the
employee leaves, the card is completed with the closing date.
Documentation – Labour Cost
Clock Card: It shows the time at which the worker arrives at work and
leaves the organisation. It shows the time worker spent in the
organisation’s premises. It is considered for attendance and in pay
calculation.
Documentation – Labour Cost
Job Card/ sheet: It is used when the employee is working on different
jobs relating to different departments. It records time, the worker
spent on each job. It is prepared for each job or batch separately.
Documentation – Labour Cost
Time card/ sheet: It is filled by each employee as a record of how his
/ her time is being spent on production. The total time on the time
sheet should correspond with time shown on the attendance record.
It is used to claim overtime. It can be filled daily or weekly.
Labour Remuneration Method
Time related pay Output related pay
Fixed Hourly base Straight piece Differential Guaranteed
Salary rate system rate system piece rate piece rate
system system
Time Related
Under this system, employees are paid based on hours, days, week or
month.
Fixed Salary: A fixed salary, which can employee receives after a
particular intervals, (usually weekly, monthly). It does not depend on
output produced. Employees paid on fixed salary basis are required
to work a minimum hours. Employees are paid extra when they work
more than the required hours.
Time Related
Hourly Based Payments/ Day Rate System: Employees paid on hourly
basis are paid on the basis of actual number of hours they have
worked and there is a fixed rate for the hours worked. It can be
calculated as:
Hourly pay = Actual hours worked x standard rate per hour
Output Related (Piecework)
Under this system employees are paid based on output. Employees
are paid only for good units produced.
Straight Piecework: Employees are paid according to the number of
units they produces in a period. A fixed rate is defined as pay for
every unit an employee produces.
Basic pay = Actual units produced x standard rate per unit
Output Related (Piecework)
Differential Piecework: Differential piecework system is where a higher
amount per unit is paid the more the employee produces. Only the
additional units qualify for the higher rate. This system is designed to
improve productivity and employee morale.
Output Related (Piecework)
Example: (Differential piece rate system)
Payments by differential piece rates for an organization are as
follows:
Up to 99 units per week $1.75 per unit
100 to 119 units per week $2.00 per unit
120 or more units per week $2.25 per unit
If an employee produces 103 units in a week how much will he be
paid?
Output Related (Piecework)
Guaranteed Piecework: In this system, the employee is paid a
guaranteed amount of minimum pay in case there is not enough
work available for each employee.
Output Related (Piecework)
Example : (Guaranteed piece rate system)
Ton is paid $8 for every unit that he produces but he has a guaranteed wage
of $70 per day. In a particular week, he produces the following units:
Monday 12 units
Tuesday 7 units
Wednesday 9 units
Thursday 14 units
Friday 8 units
Calculate Ton’s wage for this week?
Example 1, 2 & 3: Solve
Handouts:
Example 1, 2, 3, 4 & 5: Home Assignment
Idle Time/ Down Time
Time that is paid for but in which no work was done (so it is non-
productive time). It is always treated as an indirect labour cost.(both
for direct and indirect workers). It can not be in overtime but general
overtime may be arisen due to idle time.
Idle Time/ Down Time
Reasons for Idle Time:
• Production disruption
• Machine breakdown
• Shortage of material
• Inefficient scheduling
• Poor labour supervision
• Payments for tea break & lunch breaks
• Sudden fall in demand of a product, etc.
Idle Time/ Down Time
Idle Time Ratio:
Idle Time Ratio = Idle Time Hours x 100
Total Hours Paid
Total hours paid = Productive hours + Non-productive hours
Example 5: Solve
