Effective Cost Accounting to Labor Force and Labor
Cost
Salaries and wages are one of the largest costs of every company, and are often the
most difficult to control. But changing compensation is touchy for those who are affected, so it is
important to handle the changes with compassion, truth, and firmness.
One way to do this is to identify your key employees and get their commitment to
your plans before you implement them. Companies that reduce compensation
or fire employees without considering other methods to increase productivity or reduce costs
invariably suffer from poor morale, indifferent customer relations, and further declines in sales,
potentially falling into a downward spiral from which there is no recovery.
Tips to Lower Direct Labor Costs
The following tips will lead you through a difficult, though necessary process to ensure your
company is positioned to survive and thrive in any economic environment.
1. Review Levels of Compensation
Salaries and wages tend to move one way: upwardly, even though markets and
financial conditions change. Review your pay schedules to be sure they are in line with current
trends, not the result of history. If current employees are earning more than what would be paid
for their jobs today, delay or make only token raises until such time that your payroll comes in
line with current trends.
Have a frank talk with the employees affected so that they know what to expect and
why their expected raises will not happen as in the past. You might also suggest ways they can
become more valuable to the company by adding skills to earn future raises.
2. Reduce Employee Turnover
If you have significant turnover, you have excess costs in your operation due to the
fees and salaries of those people engaged in the recruitment, selection, employment, and training
of new employees. The indirect and invisible costs are poor quality, longer production times,
greater waste, greater oversight, and even fraud, since your employees view their time with you
as temporary. Maintaining a stable employee core is the key to effective cost-cutting.
3. Cross-Train Employees
Specialists workers with a unique skill or license generally command premium pay
in the marketplace. But they also inhibit your ability to make changes in your operation if you
are dependent upon their skills. A workforce trained to perform a variety of operations will
enable you to make changes, including layoffs, without affecting your ability to deliver products
or services to your customers.
4. Trade Time Off for Payroll Expense
Some companies have cut costs by changing their hours of operations. For example,
going to a four-day, 10-hour per day work week from a standard five-day, eight-hour workday in
return for a lower salary or wage may be welcomed by employees who seek more time with
families or on personal projects.
5. Share Jobs Between Employees
Office jobs are especially suited for sharing duties. Replacing full-time employees
with part-time workers can reduce your administrative costs without necessarily reducing the
hours for which the full-time employee was available.
In most communities, there are a number of skilled people limited to working part-
time. Utilize this resource when your need is less than a full work week or share a full-time job
between two part-time employees.
6. Convert Fixed Salaries and Wages Into Commissions or Fees
Rather than terminating employees, try converting their costs into an expense that is
only paid when there is accompanying revenue. For example, a salaried salesman may be willing
to accept a higher commission rate and less guarantee, or an installer might accept work as a
contract laborer when work is available.
7. Reduce Perquisites (Perqs)
If you have pension plans, convert them into profit-sharing plans. Reduce the costs of
health insurance with higher deductibles and employees paying a higher share of the premium
costs. Eliminate the perqs that began and grew during better times, including those you take as an
owner.
Eliminating visible perqs signals to employees that you are serious about cutting
business costs. If you play favorites or retain benefits for yourself or a few favorites, you are
likely to alienate your employees and make a bad situation worse.
8. Eliminate Redundancy Between Departments
As companies grow, they often evolve into a group of independent departments,
effectively eliminating inter-departmental communications and flow. In many cases, the same
task is repeated in several departments. Periodically review your processes handling orders,
collecting funds, directing installations to ensure minimal redundancy between separate
functions.
9. Automate and Outsource Non-Critical Tasks
Technology, specifically computer software, has improved enormously in recent
years; it can handle more duties, its user-friendly, and its inexpensive.
Leverage your existing employees by using the most up-to-date tools to simplify and
speed up their work. Consideroutsourcing your specialized needs to third parties, especially if
your use of those services is occasional and noncritical. Rather than maintain a licensed engineer
or a certified public accountant, for example, you may be able to utilize a less expensive clerk
and outsource oversight to an independent firm for less cost than the full salaries of the
specialists.
Before taking such action, however, be sure that the task performed will not affect the
quality of your product, the ability to deliver products, or your ability to oversee the complete
operation.
10. Work Overtime Before Hiring New Employees
Before hiring new employees, consider whether your current employees can do the
work if they are available. If so, try to expand your delivery deadlines and/or add overtime. Most
employees enjoy the extra pay. Compare the costs of overtime pay with the full costs of
attracting, evaluating, hiring, and retaining new employees. At some point, if the high demand
continues, you will be able to hire new people secure in the knowledge that their job will
continue.