Labour Costs:

Labour costs represent the various items of expenditure incurred on workers by the employer
and include the following.
(a) Monetary Benefits e.g. (1) Basic wages (ii) Dearness Allowance (iii) Employer's contribution
to Provident Fund (iv) Employers Contribution to Employer's state Insurance (ESI) scheme (v)
Profit Bonus (vi) Old age pension (vii) Production Bonus (vii) Retirement
Gratuity.
(b)Fringe Benefits or Labour Related Costs: Fringe benefits are indirect forms of employee
compensation. The total of these benefits given to workers should be sufficient enough to attract
and retain the labour force. e.g. of Fringe Benefits costs are (i) Subsidised Food; (ii) Subsidised
Housing (ii) Subsidised Education to the children of works (iv) Medical Facilities (v) Holidays pay
(vi) Recreational
Facilities.

Department involved in Labour cost control:-

Control of Labour costs is effected in a lager industrial concern by the co-ordinated
efforts of the following six department.
[Link] Department Personnel Department plays a very important role as it is primarily
concerned with the proper selection and training of works and placing them to jobs for which
they are best suited. This department is a service department and renders only advisory
functions
[Link] Department: This department prepares plans and specifications of jobs makes
job analysis, conduct time and motion studies, makes provision for safe working conditions and
supervises production activities
[Link] or Time and Motion Study Department: This department works in close harmony with the
personnel, engineering and cost department.
4. Time-keeping Department: This department is concerned with the recording of time of each
worker engaged in the factory. The recording of time is for two purpose, i.e. for Time-keeping
and Time Booking
Time-keeping is the recording of time for the purpose of attendance and wage calculations.
Time booking is the recording of the time for purposes of cost analysis and apportionment
of labour costs over various jobs.
5. Payroll Department: This department maintains a record of job classification and
wage rate of each employee and performs the function of computation of wages payable
to them by preparing payroll or wage sheet.
[Link] Accounting Department: This department is responsible for the accumulation and
classification of all cost data of which labour is one of the elements. This department is
responsible for analysing the payroll in order to render routine and special labour cost reports
revealing the amount of normal and abnormal idle time, direct and indirect labour, overtime and
variances from budgeted labour costs.
Labour turnover is defined as "the rate of change in the composition of the labour force in an
organisation.
Labour turnover varies greatly between different trade and industries.

Measurement of Labour Turnover

There are three different methods of measurement of labour turnover which many be given as
follows.
1. Separation Method: This is the most commonly used method. Under this method
measurement is made by dividing the total number of separations during a period by the
average number to workers on the roll during that period.
Labour Turnover=Formula
[Link] Method: This method takes into account only those new workers who have
joined in place of those who have left.
Labour Turnover= Formula
While calculating the number of replacements, new workers recruited because of
expansion should not be taken into account.
[Link] Method: This method takes into consideration both the number of workers left as well as
number of new workers who have joined
Labour Tumover=Formula

Causes of Labour Turnover:

A minimum level of labour turnover is quite normal and inevitable. It is also desirable and good
for the health of the industry. Labour turnover makes room for the entrance of new blood in a
firm and prevents stagnation in the work stream. The problem is of excessive labour turnover
i.e. when the workers leave because of abnormal or unnecessary reasons.
The causes of labour turnover may be classified as (1) avoidable and (ii) unavoidable.
Avoidable causes: These include -
1. Low wages and allowances.
2. Unhappy relations with co-workers and supervisors.
3. Unsatisfactory working conditions.
[Link] union rivalry.
[Link] of medical facilities, transport facilities [Link] job security and retirement benefits.
Unavoidable causes: These include -
1. Death or retirement
2. Illness or accident
[Link] problems
4. Seasonal nature of business
[Link] in plant location
6. Change of job for betterment
7. Discharge on disciplinary grounds
8. Marriage-particularly in the case of women workers.
Motion Study:
Motion study is the science of eliminating wastefulnew resulting from using unnecessary, ill
directed and inefficient motions. It is a detailed staly and analysis of the movements of an
operation in performing an operation for the purpose of eliminating unnecessary and useless
motions. Motion study is a means to increase production, greater efficiency in plant
organisation, less human fatigue and lower cost of production

Job Analysis:
Job analysis is the process of determining the tasks which comprise the job and the skill,
knowledge, abilities and responsibilities required of the worker for its successful performance. In
simple words, it is an analysis of a job to determine the qualities needed by workers to perform
the work satisfactorily.
Job analysis helps in fixing wages rates for different jobs and also helps in the right recruitment,
selection and placement of workers.
Job Evaluation:
Job evaluation is a systematic technique which is used to determine the worth of a job. This
technique is used for determining the relative worth of various jobs within an organisation and
for the establishing an adequate wage structure. Job evolution is concerned with the
ascertainment of money value of a job and should follow the job analysis process which
provides the basic data of job descriptions and specifications of measuring the money of a job.

Concept of Idle Time:

Idle time may be defined as that time for which wages are paid but no production obtained. This
is the time which cannot be attributed directly to any productive work. Idle time may represent
loss of time of labour, machines due to lack of materials, break is down of machinery, failure of
power supply, etc.

Causes Idle time may occur owing to productive, administrative or economic causes.
(a) Productive causes: The productive causes are those which result in loss of production.
These include
[Link] time due to machine
[Link] failures
[Link] for tools and raw materials.
[Link] for work.
[Link] for instructions.
(b) Administrative Causes: Sometimes administrative decisions are also responsible for idle
time. For eg. incase of a surplus capacity of plant and machinery, management may decide not
to work fully and there may be some idle time.
(c) Economic Causes: Idle time may arise due to seasonal nature of industries. For eg. in the
case of woollen goods,ice-cream industry, production cannot be evenly distributed throughout
the whole year.

Treatment of Idle Time Cost:

From the point of view of treatment in cost accounts, idle time is classified as normal and
abnormal
[Link] Idle Time:
Normal Idle Time refers to that loss of time which is generally unavoidable and is bound to arise.
For eg. time spent in setting the machines, adjusting the tools, moving from one job to another,
tea breaks, personal needs, etc. Cost of normal idle time is treated in one of the following ways
(a) It is directly charged to factory overhead account
(b) Wage rate may be inflated so as to make allowance for normal loss of labour time.
Cost of normal idle time is treated in one of the following ways
(a) It is directly charged to factory overhead account
(b) Wage rate may be inflated so as to make allowance for normal loss of labour time,
The second method is not considered very desirable as the cost of idle time should be treated
separately instead of being absorbed as a part of direct labour cost.
Abnormal Idle Time: Abnormal Idle time which arises due to reasons in no way com nected with
the usual routine of manufacture and for which employer must pay. For eg. time lost due to
breakdown of machinery, strikes and lockouts, time lost in waiting for tools, accidents.
Control of Idle Time: For control purposes, Idle time should be divided into controllable and
uncontrollable. Idle time arising due to controllable causes should be properly analysed and
responsibility fixed on appropriate individuals.
The following steps may be taken to control idle time.
(a) Production should be properly planned so that imbalances in production ar avoided
or reduced.
(b) Repairs and maintenance of plant and machinery should be regularly undertaken
to avoid breakdown.
(c) Raw materials, tools and instructions should reach the worker well in time so that no time is
wasted in waiting for them.
(d) Supervision should be tightened.

Overtime:
Overtime work is work done beyond normal working hours. The Factories Act provides for
payment of overtime wages at double the normal rate of wages. The payment of overtime
consists of two elements-one for normal, Le, the weasl amount and the second extra payment
overtime work involves extra cost and should be restored to only when extremely essential.

Limitations of overtime :
1. It leads to excessive Isbour cost.
2 During overtime hours, labour productivity is decreased because of diminishing labour
efficiency
[Link] leads to unusual strain on plant and machinery
[Link] has a bad effect on the health of the workers
[Link] like lighting cost may increase because of work in the evening
[Link] may develop a tendency to work in overtime and take overtime as a part of their
normal earnings
[Link] may lead to discontent among workers if overtime is not property distributed.
Treatment of overtime cost :
The treatment of overtime depends upon the circumstances under which it arises. These are

(a)Where the customers agree to bear the entire charge of overtime due to urgency of work, it
should be charged direct to the job or work order concerned.
(b) Overtime required because of some abnormal conditions like floods, earthquakes
should be charged to costing profit and lost account.
(c) When overtime work is required to make up any shortfall in production due to some fault of
management, it should be charged to costing profit and lost account
(d) Overtime required for seasonal pressure should be taken either as general overhead
or as deferred expense for absorption equitably over the entire production.

Methods of Wage Payment and Incentive Schemes:

There are two basic methods of labour remuneration:
1. Time Rate System and
[Link] Rate System. In addition, there are a number of incentives plans to induce workers to
work hard so as produce more and earn more.
Time Rate System:
In this system, workers are paid according to the time for which they work, payment may be on
hourly basis, daily basis or monthly basis. Under this System, no consideration is given to the
quantity and quality of work done.
The formula for calculating wages under this system is =Number of Hours worked x
Rate per hour.
Advantages:
The advantages of time rate system are:
1. Simplicity: The system is simple and calculation of wages is easily understood by the
workers.
2. Security to Workers: Workers are assured of a certain amount of wages payable even if there
is stoppage of work due to power failure, machine breakdown.
3. Quality of work: This method doesn't give weight to the quantity of work done, workers
can concentrate on the quality of goods produced.
4. Accepted by Trade unions: Trade Unions mostly favour this method.
Disadvantages:
The disadvantages are:
1. Idle Time: Workers waste a lot of time resulting in increase in idle time.
[Link] Incentives: It offers no positive inducement to workers to improve performance.
3. Low Quantity: When workers are paid on time basis, they tend to be slow in work.
This results in lower production quantity.
[Link] difficulties: It creates difficulties in the calculation of labour cost per unit because the
output is constantly fluctuating
Piece Rate System:
Piece rate is that rate which is paid to a worker for producing a unit of output, without any regard
to the time taken. A rate per unit of output is fixed and earnings are calculated by multiplying
rate to the numbers of units produced.
Advantages:
1. Simple and easy: This method is simple and is easily understood by the workers.
2. Incentive to efficient workers: The method provides a strong incentives to work more because
remuneration is in proportion to the workers effort.
[Link] in Production: Each worker tries his best to produce more to earn higher wages. This
results in increase in production.
[Link] cost: On account of increase in production, fixed cost per unit is reduced resulting in
higher profit.
5. Equitable: This system is equitable.
6. Supervision: The workers are interested in maximizing their earnings, so strict supervision is
not necessary.
Disadvantages:
1. Difficulties in fixing piece rate: Fixing equitable piece rate is a difficult task.
2. Opposed by trade unions. This system is generally opposed by trade unions because it
creates inequality in the wages of workers.
3. Poor quality of work: This method ignores quality of work. In order to maximize their wages,
workers try to produce more and more without caring for the quality of production.
[Link] security of wages: Earnings of workers are uncertain because if a worker is not able to
complete his days work, he is paid less wages. 5. Injurious to health of workers: To earn more
wages workers try to work excessively
and with speed. This proves injures to the health of workers.

INCENTIVE PLAN
Incentive may be defined as "the stimulation of effort and effectiveness by offering monetary
inducement or enhanced facilities." An incentive may be monetary or non monetary The main
object of an incentive wage plan is to induce the worker to produce more and by producing
more to secure a higher wage while saving in production cost per unit. Any incentive scheme
should encourage the workers to put in their best on their jobs.

Various Incentive Plans:

1. Halsey plan: This plan was first introduced by F. A. Halsey, a mechanical engineer in America
in 1891. Under this plan, bonus is paid on the basis of time saved. A standard time is set for
each job or process. If a worker takes the standard time to do it or even exceeds the standard
time limit, he gets normal wages calculated at the time rate. If he completes his job in less than
the standard time, he gets a bonus equal to 50% of the value of time saved, The total earning of
a worker, under this system are wages for the actual time spent plus a bonus equal to 50% of
the value of time saved. The formula for calculation of bonus and total earnings under this plan
is given as:
Bonus- 50% of (Time saved x Time rate)
Total earning =Time rate x Time taken + 50% (Time saved x Time rate)

Advantages:
1.t is easy to understand and simple to operate.
2. This plan provides a strong incentive to improve efficiency.
3. The benefit of time saved is distributed equitably between employer and employee

Disadvantages:
1. This plan does not provide the employer with full protection against high rate setting
[Link] is not strong as with piece rate system.

[Link] Plan: Under Rowan Plan, the worker is again guaranteed wages at the ordinary rate
for the time taken by him to complete the job. Under this method bonus is that proportion of the
wages of the time taken which the time Saved bears to the standard time allowed.
The formula for calculation of Rowan plan:

Advantages:
1. It provides guaranteed minimum wages to workers.
2. It provides good incentive for comparatively slow workers and beginners.
3. Fixed overhead cost per unit is reduced with increase in production.

Disadvantages :
1. It is more complicated and costlier than the Halsey plan.
2. It is not easily understood by workers.

[Link]'s Differential piece rate system:

This system was introduced by F.W. Taylor, the father of scientific management. Under this
system, the standard task is established after careful time and motion study and two piece rates
are set. The low rate is for sub-standard performance and high rate for standard and above
standard performance.

Advantages:
1.t is simple to understand and operate.
[Link] attracts efficient workers.
[Link] helps much in increasing production by offering higher rates to more efficient workers.

Disadvantages:

(1) It does not guarantee the minimum day wages and this insecurity affects the morale of
workers.
(2) Labour cost will differ between the two levels of performance because of two different rates.

Short note
Time keeping: Time keeping is the recording arrival and departure time of workers for
attendance purpose and for calculation of wages.
Objects: The objects of time keeping are
(a) To have a correct record of attendance for meeting statutory requirements;
(b) Preparation of the payroll;
(c) To enforce discipline in attendance and
(d) Overhead distribution.
Methods of Time-Keeping:
The methods can be broadly classified into two categories
(a) Manual methods (b) Mechanical methods.

Time Booking: Time Booking is a process of recording the time spent by a worker en different
jobs carried out by him during his period of stay in the factory.
Objectives:
The objectives of time booking are
(i)to ascertain the cost of work done,
(ii) to ensure that time for which workers has been paid is properly utilised.
(iii) to provide a basis for the apportionment of over-heads, and
(iv) to ascertain the idle time so as to control it.